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The 1975 Buffett memo that saved WaPo's pension

August 15, 2013: 7:00 AM ET

A letter to Katharine Graham offers an early window into how Warren Buffett thinks about investing.

FORTUNE -- One of the (many) things that surprised people about the recent $250 million sale of the Washington Post to Amazon (AMZN) founder Jeff Bezos was the health of the Washington Post's pension plan. At a time when most pension plans are struggling, the Post has $1 billion more than it needs. (As part of the deal, Bezos is getting $333 million for the new newspaper company's pension fund, which Post chairman Don Graham says is $50 million more than Bezos needs to meet his current obligations.) Graham told Fortune there are two words that explain why: Warren Buffett.

In October 1975, Buffett sent The Washington Post's (WPO) then chairman and CEO Katharine Graham a memo about the brewing problems in pension plans, and Buffett's suggestions for how the Post could avoid them. Graham took Buffett's advice, and the rest ... you know. For a story in the current issue of Fortune, Buffett talked about the story of the Washington Post's pension plan ("Kay Graham was a smart woman," says Buffett) and shared for the first time publicly the letter that he sent Graham.

Read the entire story: Warren Buffett's billion-dollar memo.

The letter alone is quite amazing. In it, Buffett identifies the pension problems that others would key in on only a decade or so later. But he also lays out perhaps for the first time -- Buffett was 45 when he wrote it and years away from attaining the investment fame he has today -- his philosophy behind what it takes to be a successful investor. His main pieces of advice: Think like an owner, look for a discount, and be patient.

Buffett's obvious wit and signature charm are evident throughout the letter. And there's an early version of Buffett's famous story of why investors shouldn't chase the hot fund managers and instead focus on how they got those returns:

"If above-average performance is to be their yard stick, the vast majority of investment managers must fail. Will a few succeed -- due to either to chance or skill? Of course. For some intermediate period of years a few are bound to look better than average due to chance -- just as would be the case if 1,000 'coin managers' engaged in a coin-flipping contest. There would be some 'winners' over a five or 10-flip measurement cycle. (After five flips, you would expect to have 31 with uniformly 'successful' records -- who, with their oracular abilities confirmed in the crucible of the marketplace, would author pedantic essays on subjects such as pensions.)"

Below is the whole letter. Read it. Even for someone who knows quite a bit about Buffett and investing, there's a lot to learn and enjoy in it. I did.

(To enlarge, click on the icon in the lower right corner)

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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