Last month, it was announced that Amazon founder and CEO Jeff Bezos was going to acquire The Washington Post newspaper. Like many newspapers in the western world, the Post is not making much money, even though it is making some, which is more than Amazon is.
Some of the news stories that followed said that one of the reasons that the Post’s financial future was dim was the state of its pension fund. Not only were such claims wrong, but the reason why they were wrong holds some interesting lessons for everyone trying to save for retirement.
During the sixties and the seventies, many American companies set up pension systems that guaranteed pensions to retired employees. Over the next few decades, many of these funds turned out be severely short of funds, leading to great financial pain either for the retirees or the companies, most famously for General Motors.
However, the Post’s pension fund is almost unique in being heavily over-funded. It has almost a third more assets than it needs to fulfil its obligations even though it has received no fresh inflows for years. How does the Post find itself in this happy situation? As the companies’ chairman said in a statement some months ago, ‘the reason we have an overfunded pension plan is summed up in the two words, Warren Buffett’.
As has been noted by some US business publications recently, when Buffett had a stake in the company, he wrote a long note to owner Katharine Graham laying down the problems inherent in pensions and how they could be avoided.
American commentators have noted that the main points of Buffett’s advice was to ‘think like an owner, look for a discount and be patient.’ This is the value investing mantra that worked so well for his own investments. However, in India the most important point would be something that the Americans take for granted: invest in equities.
As Buffett eloquently points out in the note, fixed income investing will always seem safe but will eventually lose out to inflation. If you think your retirement kitty should be in ‘safe’ deposits, you should google for this letter and read it — it will be an eye opener.