Warren Buffett opened his annual letter to the shareholders of Berkshire Hathaway--where he serves as chairman of the board--with a disclaimer: “A number of good things happened at Berkshire last year, but let’s first get the bad news out of the way.”

He apologized for the lackluster gains of 2012, noting, “When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in which we had a gain of $24.1 billion would be subpar. But subpar it was.”

Buffett then went on to describe several deals and acquisitions from the past year that had him excited. Among them, surprisingly: newspapers. Berkshire Hathaway has acquired 28 daily newspapers in the past 15 months at a cost of $344 million.

“This may puzzle you [as] I have long told you in these letters and at our annual meetings that the circulation, advertising and profits of the newspaper industry overall are certain to decline,” he wrote.

Why, if newspaper sales are going down the tubes, would one of the world’s most recognizable serial entrepreneurs invest in them?

There are a few reasons, Buffett explains. And you might learn something from them.

The product is something people will always want.

“News is what people don’t know that they want to know,” Buffett quips. He believes that people will seek out the news--or information that is of particular importance to them--no matter what.

The trick, he says, is determining how to provide news to consumers in a way that is immediate, easy to access, reliable, comprehensive, and cheap. Oh yeah, and still make a profit doing it. He thinks that can be done.

The industry has evolved--but the product still has value.

According to Buffett, the word “news” used to mean what we think of as “breaking news.” In other words, news meant highly exclusive information delivered to the public in a timely manner. That’s all changing now, he says.

“Stock market quotes and the details of national sports events are old news long before the presses begin to roll,” Buffett says. But people still rely on old-school papers for the delivery of local news--an argument that has been reinforced time and again by the continued growth of the so-called "hyper local" news market.

“Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents," Buffett says.

Great innovators embrace challenges.

“Even a valuable product can self-destruct from a faulty business strategy,” writes Buffett. This, it would seem, is how he categorizes the advertising-dependent business model of traditional newspapers. The time is ripe for a new strategy, he contends, citing pay models like those adopted by The Wall Street Journal and The New York Times.

But will the public pay for small town news? Sure, Buffett says. He's seen it done.

He cites the Arkansas Democrat-Gazette as the "main exemplar for local newspapers." The Democrat-Gazette adopted a pay format early on, he says, and has been able to retain circulation “far better than any other large paper in the country.”

Berkshire Hathaways's newspapers, Buffett says, have only just begun exploring pay arrangements in the past year--but he's hopeful.

Whatever pay model works best will be copied--and widely, he says. Of course, Buffett is still a pragmatist. And he does not approach the newspaper business with naivete. Berkshire Hathaway, he says bluntly, "will not continue the operation of any business doomed to unending losses."