C&B Notes

Buffett Reveals ’75 Private Letter on Pensions

Jeff Bezos’ purchase of The Washington Post has been much discussed, but we took particular notice of a fact that the deal highlighted: its $1 billion over-funded pension plan.  This unusual status is the result of advice Warren Buffett gave Katharine Graham over the years, the essence of which is captured in a letter he sent her in 1975.  Shareholders and employees of most businesses would be better off if their management teams had received and then   this commonsense advice about the extent and reality of pension promises and the investment of plan assets.  The letter provides a glimpse of Buffett’s genius and offers useful advice for investors today.

Summing Up:

    1. If the economic world turns out to be one of sustained double-digit inflation — probably still unlikely but not unthinkable — among the carnage will be private pension plans.  The investment process can do little to modify that disaster.  Hope lies mainly in the care with which past promises have been made, and the ownership of a business whose economic characteristics allow pass-through pricing which includes a large part of past labor costs, as well as full current costs.
    2. In a more orderly world, the care with which promises have been worded remains important, but on a scale that diminishes as inflation moderates.  Conventional approaches to money management should not be expected to produce above average results.  But average will be perfectly acceptable at low inflation rates.
    3. A mildly non-conventional investment approach, emphasizing a business approach to security selection, gives some opportunity for long-term results slightly above average without corresponding increase in investment risk.

Access the full letter on our Bookshelf.