More Praise for The Warren Buffett Way, First Edition

franchise
and 
brand value
to describe the American Express
Card. Over the next two years, Golub began to liquidate the company’s
underperforming assets and to restore prof itability and high returns on
equity. One of his f irst actions was to get rid of Shearson Lehman, with
its massive capital needs.
Soon American Express was showing signs of its old profitable self.
The resources of the company were solidly behind Golub’s goal of build-
ing the American Express Card into “the world’s most respected service
brand,” and every communication from the company emphasized the
franchise value of the name “American Express.”

---

9 2
T H E W A R R E N B U F F E T T W AY
Next, Golub set f inancial targets for the company: to increase earn-
ings per share by 12 to 15 percent a year and 18 to 20 percent return on
equity. Before long, the company was again generating excess cash and
had more capital and more shares than it needed. Then, in September
1994 the company announced that, subject to market conditions, it
planned to repurchase 20 million shares of its common stock. That was
music to Buffett’s ears.
That summer, Buffett had converted Berkshire’s holdings in pre-
ferred stock to common, and soon thereafter, he began to acquire even
more. By the end of the year, Berkshire owned 27 million shares. In
March 1995, Buffett added another 20 million shares; in 1997, another
49.5 million; and 50.5 million more in 1998. At the end of 2003, Berk-
shire owned more than 151 million shares of American Express stock,
nearly 12 percent of the company, with a market value of more than $7
billion—seven times what Buffett paid for it.
The Washington Post Company
The 
Washington Post
generates substantial cash f low for its owners, more
than can be reinvested in its primary businesses. So its management is
confronted with two rational choices: Return the money to shareholders
and/or profitably invest the cash in new investment opportunities. As
we know, Buffett prefers to have companies return excess earnings to
shareholders. The Washington Post Company, while Katherine Graham
was president, was the first newspaper company in its industry to repur-
chase shares in large quantities. Between 1975 and 1991, the company
bought an unbelievable 43 percent of its shares at an average price of $60
per share.
A company can also choose to return money to shareholders by in-
creasing the dividend. In 1990, confronted with substantial cash reserves,
the 
Washington Post
voted to increase the annual dividend to its share-
holders from $1.84 to $4.00, a 117 percent increase (see Figure 6.1).
In addition to returning excess cash to its owners, the 
Washington
Post
has made several profitable business purchases: cable properties from
Capital Cities, cellular telephone companies, and television stations. Don
Graham, who now runs the company, is continually beset with offers. To
further his goal of developing substantial cash f lows at favorable invest-
ment costs, he has developed specific guidelines for evaluating those

---

I n v e s t i n g G u i d e l i n e s : M a n a g e m e n t Te n e t s
9 3
offers. He looks for a business that “has competitive barriers, does not re-
quire extensive capital expenditures, and has reasonable pricing power.”
Furthermore, he notes, “we have a strong preference for businesses we
know” and given the choice, “we’re more likely to invest in a handful
of big bets rather than spread our investment dollars around thinly.”
9
Graham’s acquisition approach mimics Buffett’s strategy at Berkshire
Hathaway.
The dynamics of the newspaper business have changed in recent
years. Earlier, when the economy slowed and advertisers cut spending,
newspapers could maintain prof itability by raising lineage rates. But
today’s advertisers have found cheaper ways to reach their customers:
cable television, direct mail, and newspaper inserts. Newspapers are no
longer monopolies; they have lost their pricing f lexibility.
Even so, Buffett is convinced that the Post is in better shape than
other media companies. There are two reasons for his optimism. First,
the Post’s long-term debt was more than offset by its cash holdings.
The 
Washington Post
is the only public newspaper that is essentially
free of debt. “As a result,” explains Buffett, “the shrinkage in the value
of their assets has not been accentuated by the effects of leverage.”
10
Second, he notes, the Washington Post Company has been exception-
ally well managed.
Figure 6.1
The Washington Post Company dividend per share.

---

9 4
T H E W A R R E N B U F F E T T W AY
The Pampered Chef
Doris Christopher, the founder, chairman and CEO of the Pampered
Chef, has allocated her capital well—financing all expansion and growth
through internal earnings. She has reinvested virtually all her profits
in the company and the resulting expansion has brought tremendous
growth in sales. Between 1995 and 2001, the Pampered Chef ’s business
grew an astonishing 232 percent, with pretax profit margins above 25
percent. And the only debt the company ever had was the original $3,000
seed money that Christopher borrowed from her life insurance policy.
From all appearances, Doris Christopher is a careful and profitable
manager, and she runs a tight ship. She displays keen management intu-
ition by treating her representatives well but competitively. The Pam-
pered Chef ’s direct marketers across the country are the bread and butter
of the business and the company’s only direct contact with its over 12
million customers. The sales force earns commissions of 18 to 20 percent
on goods they sell, and 1 to 4 percent on the sales of kitchen consultants
whom they bring into the company.
C A N D O R
Buffett holds in high regard managers who report their companies’ f i-
nancial performance fully and genuinely, who admit mistakes as well as
share successes, and who are in all ways candid with shareholders. In