Investing Guidelines: Financial Tenets 117the company defeated a strike by the Newspaper Guild and, after lengthy
negotiations, the printers settled on a new contract.
In the early 1970s, Forbeshad written, “The best that could be said
about The Washington Post Company’s performance was it rated a gen-
tleman’s C in prof itability.”^8 Pretax margins in 1973 were 10.8 per-
cent—well below the company’s historical 15 percent margins earned
in the 1960s. After the successful renegotiation of the union contracts,
the Post’s fortunes improved. By 1978, prof it margins had leaped to
19.3 percent—an 80 percent improvement within f ive years.
Buffett’s bet had paid off. By 1988, the Post’s pretax margin reached
a high of 31.8 percent, which compared favorably with its newspaper
group average of 16.9 percent and the Standard & Poor’s Industrial aver-
age of 8.6 percent. Although the company’s margins have declined some-
what in recent years, they remain substantially higher than the industry
average.
THE ONE-DOLLAR PREMISE
Buffett’s goal is to select companies in which each dollar of retained
earnings is translated into at least one dollar of market value. This test
can quickly identify companies whose managers, over time, have been
able to optimally invest their company’s capital. If retained earnings are
invested in the company and produce above-average return, the proof
will be a proportionally greater rise in the company’s market value.
In time, that is. Although the stock market will track business value
reasonably well over long periods, in any one year, prices can gyrate
widely for reasons other than value. The same is true for retained earn-
ings, Buffett explains. If a company uses retained earnings unproduc-
tively over an extended period, eventually the market, justif iably, will
price its shares disappointingly. Conversely, if a company has been able
to achieve above-average returns on augmented capital, the increased
stock price will ref lect that success.
Buffett believes that if he has selected a company with favorable long-
term economic prospects run by able and shareholder-oriented managers,
the proof will be ref lected in the increased market value of the company.
And he uses a quick test: The increased market value should at the very
least match the amount of retained earnings, dollar for dollar. If the value