Warren Buffett s Steely Resolve

Warren Buffett s refusal to follow the lemmings over the edge of the cliff during the height of U.S. stock market frenzy in the late 1990s offers a simple yet powerful lesson about boldness: sometimes discretion is the better part of valor.

As valuations in equities markets skyrocketed, business reporters chastised Buffett, chairman and CEO of Berkshire Hathaway, from all angles for not investing in high-flying technology and telecommunications stocks. Time magazine published an article touting The Fall of Buffett and accused him of being out of synch with technology stocks. ^[8] Assaults on his value-oriented approach likewise came from overseas: the Sunday Times of London went so far as to suggest that Buffett break up Berkshire Hathaway, claiming it looked like a fish out of water in the online new economy. ^[9]

Weighing the potential rewards that the skyrocketing markets offered against the risk of an inability to exit a richly valued position, Buffett decided the trade-off was undesirable. In the face of mounting criticism and a lagging Berkshire Hathaway share price, he resolutely adhered to his tried-and-true method of investing in companies that he understood , that generated positive cash flow, that enjoyed strong brand recognition, and that commanded respect from consumers and the general investing public.

After the tech bubble burst in late 2000 to early 2001, the very same business reporters began to laud Buffett for his steel nerves and principled investing approach. Instead of suggesting his demise, the Sunday Times published an article titled How to Be a Successful Investor, ^[10] which highlighted Buffett s shrewd investment style as a model to be emulated. Fortune magazine proclaimed, the world s greatest investor is back on top. ^[11] And in July 2002, Buffett even went so far as to add a new economy company to his portfolio. He led a consortium that invested $500 million in Level 3, a beleaguered telecommunications service provider with a high-quality fiber optics network. ^[12] At the time of his investment, Level 3 s shares were priced at 3.3 percent of their calendar-year-2000 high. ^[13] At the time of writing the shares were priced at 5.3 percent of the same high, an appreciation of almost 60 percent. ^[14]

Leadership Lessons

A self-admitted technophobe, Buffett knew his limitations and resisted temptation amid widespread euphoria. When asked in 2002 if accusations of being a has-been bothered him, he replied, Never . . . You can t do well in investments unless you think independently. And the truth is, you re neither right nor wrong because people agree with you. You re right because your facts and your reasoning are right. In the end, that s all that counts. After the bubble burst, Buffett was rewarded for this independence of mind and self-assuredness with an almost unfettered ability to capitalize on distressed valuations as the buyer [of companies] who can come up with cash over a weekend . ^[15]

^[8] Kadlec, Daniel, The Fall of the Mighty Buffett, Soros, Robertson. They re out of synch with stocks and you can learn from their errors, Time , May 15, 2000.

^[9] Jay, John, Time for Buffett to Break Up Berkshire Hathaway, Sunday Times of London, January 9, 2000.

^[10] Budworth, David, How to Be a Successful Investor, Sunday Times of London, November 17, 2002.

^[11] Serwer, Andy, The Oracle of Everything, Fortune , November 11, 2002, cover.

^[12] Buffett led a consortium of investors that invested in Level 3 s convertible bonds , which pay a 9 percent coupon and can be converted into equity at a premium to Level 3 s share price at the time of investment. Given the relatively high coupon and low share price at the time the deal was struck, this investment was very attractive. Buffett s initial investment was $100 million; Longleaf Partners invested $300 million, and Legg Mason contributed the remaining $100 million.

^[13] Level 3 s all-time high share price was $130.19 on March 10, 2000.

^[14] As of May 23, 2003.

^[15] Serwer, 74.