San Diego Charles Brandes, 64, and Warren Buffett, 77, have a lot in common. They both have made fortunes by following the "value" investing concept. It was taught to them by the same person: Benjamin Graham, along with his academic sidekick and coauthor David Dodd. Buffett studied under Graham at Columbia and later went to work for him on Wall Street. Graham retired to La Jolla and in the 1970s met Brandes, a young stockbroker aspiring to be a money manager. Brandes spent a lot of time absorbing Graham's knowledge and went on to form a money management firm in 1974, one of the worst years for the market in the 20th Century.
Buffett went on to become the second-richest person in the U.S., with $52 billion in net worth, according to the latest Forbes 400 tabulation of the wealthiest Americans. Brandes, worth $2.5 billion, is tied for 165th on the recent Forbes 400 list. Buffett built a company, Berkshire Hathaway, that takes positions in stocks that he believes have intrinsic values the market has overlooked. Brandes built San Diego's Brandes Investment Partners, which manages $125 billion for others, using the same "value" investing concept, often snatching stocks the market is thumbing down and is driving the same direction. These tools were first outlined by Graham and Dodd in their classic book, Security Analysis, published in 1934 -- another lousy year for the stock market.
Brandes and Buffett have their differences. Despite his enormous wealth, Buffett lives in a modest house in Omaha. Brandes, on the other hand, has recently completed a 54,000-square-foot home on 30 acres in Rancho Santa Fe -- the most expensive residence ever built in the county. Forbes puts the value of the house at $60 million. Brandes and his strikingly beautiful wife, Tanya, got married there last year. Elton John provided accompaniment.
Although they share the same philosophy of investing, Brandes and Buffett have strongly opposing views on one industry: newspapers. The annual meeting of Buffett's Berkshire Hathaway is a celebrated event throughout the investment world. At last year's meeting, Buffett stated, with his usual bluntness, "Newspapers face the prospect of seeing their earnings erode indefinitely. It's unlikely that at most papers, circulation or ad pages will be larger in five years than they are now. That's even true in cities that are growing." Buffett continued, "It's hard to make money buying a business that's in permanent decline. If anything, the decline is accelerating. Newspaper readers are heading into the cemetery, while newspaper nonreaders are just getting out of college. The old virtuous circle, where big readership draws a lot of ads, which in turn draw more readers, has broken down."
Buffett's company still has an interest in newspapers. As of the most recent proxy statement, Berkshire Hathaway has 18.1 percent of the Washington Post Co.; Buffett sits on its board and chairs the finance committee. Berkshire also owns 100 percent of the Buffalo News.
Brandes, however, sees intrinsic value in newspapers at today's depressed stock prices. His firm owns 11.25 percent of Gannett, the largest newspaper chain. And he has been buying more, becoming Gannett's largest holder. Between March and November of this year, he almost doubled his stake. This was a period in which the stock was plummeting from around $55.50 to $36.50, about where it is now. Only three years ago, the stock was trading above $91.
Gannett publishes USA Today, the nation's best-selling newspaper, along with 84 other dailies and 1000 nondailies. A subsidiary is Britain's second-largest regional newspaper company. Gannett has 20 TV stations in the U.S. and more than 130 Internet sites. Newspapers are almost 90 percent of revenue. Gannett is a bellwether for the newspaper industry, and that's not a good portent. Standard & Poor's says Gannett's revenues will fall almost 5 percent this year, possibly rebounding next year. The company has a heavy presence in Arizona, California, Florida, and Nevada, where mortgage problems are cancerous. Stock-rating firm Morningstar has lowered its fair value of Gannett stock to $43 a share from $65.
Brandes Investment Partners also owns 14.63 percent of newspaper chain McClatchy. This is a disaster story. Last year, it purchased the much larger Knight Ridder chain. McClatchy's stock was above $53 at the time. Now it's around $13. McClatchy paid $6.5 billion for Knight Ridder, then dumped a dozen papers it didn't want for what seemed like good prices. But it didn't work out that way. McClatchy still has a pile of debt, although it is trying to pay it off. Moody's, the bond-rating agency, is threatening to lower the ratings of McClatchy's junk bonds even further. Last month McClatchy wrote down the value of the company by $1.52 billion. Revenues plunged by 9.2 percent in the third quarter, and Standard & Poor's sees a drop of 12.5 percent in the fourth quarter. In March of this year, McClatchy sold the Minneapolis Star Tribune for $530 million -- less than half what it had paid for the property seven years earlier.
Morningstar has lowered the fair value estimate of the stock to $15 a share from $20. It notes that McClatchy gets one-third of its revenue from Florida and California, where the mortgage crisis is whacking retail sales and advertising.
There are rumors that the Brandes firm will use its heavy stock position to force Gannett to break itself up into different publicly traded entities. E.W. Scripps and Belo are already splitting themselves into separate stocks, peeling off the ailing newspaper segments from more promising businesses. Gannett says it won't hear of such a thing. The Brandes firm says it is a passive investor -- a signal that it won't be muscling Gannett into a breakup. There wouldn't likely be such a caper at McClatchy: the reigning family has a hammerlock on stock voting power.
It boils down to this: newspapers are actually more profitable than most other industries -- for now, anyway. It's just that people like Buffett -- as well as investors generally -- don't believe metropolitan dailies have a future. Smaller dailies and weeklies are doing less poorly and may have more promising horizons. The Brandes firm, which stresses long-term investing, obviously sees intrinsic value in stocks that have been dispiteously pounded by the market. That's what value investing is all about. But with newspapers, Brandes is battling inexorably declining results, as well as negative investor sentiment. Sometimes, the market has it right.