Warren Buffett: 'I told you so'

Whichever way the herd runs, following Buffett can pay off

Investor Warren Buffett took a pasting for ignoring the 1999 surge in dot.com stocks. Now he is enjoying the last laugh, as BBC News Online North America business reporter David Schepp explains.

If investment guru and billionaire Warren Buffett had just one message for investors following the bursting of the internet bubble, it could be: "I told you so."

Mr Buffett, whose moves in the stock market are closely followed by investors, noted in a letter to shareholders of his company, Berkshire Hathaway that technology investors have overstayed the party.

Value is destroyed, not created, by any business that loses money over its lifetime

Warren Buffett

And, following in the footsteps of US central bank chairman Alan Greenspan, Mr Buffett said that the "irrational exuberance" which invaded stock markets in 1999 and early 2000 has left investors expecting unrealistic returns.

Mr Buffett, who was widely chastised by analysts and in the press last year for failing to cash in on the boom in technology stocks, cited evidence from a Paine Webber-Gallup survey of investors conducted in December 1999.

Dulled into complacency

Participants were asked their opinion about the annual returns investors could expect to realise over the decade ahead.

They answered, on average, rises of 19%, to which Mr Buffett retorted that there were not enough businesses in the country to ensure a return of that magnitude.

The fact is that a bubble market has allowed the creation of bubble companies, entities designed more with an eye to making money off investors rather than for them

Warren Buffett

Mr Buffett warned that the outsized returns experienced by technology investors during 1998 and 1999 had dulled them into complacency.

"After a heady experience of that kind," he said, "normally sensible people drift into behaviour akin to that of Cinderella at the ball.

"They know that overstaying the festivities... will eventually bring on pumpkins and mice."

'Corporate chain letters'

Mr Buffett noted that investors had been hypnotised by the staggering ascent of tech stocks and ignored everything else, including whether the businesses they were investing in were making money.

Without naming them directly, Mr Buffett aimed some of his harshest comments toward dot.coms, those internet-based businesses which issued shares in widely anticipated floats only to shut up shop a few months later.

a fine though unglamorous business, an outstanding manager and a price... that made sense

Buffett on why he invested in Cort Business Services

"Value is destroyed, not created, by any business that loses money over its lifetime," Mr Buffett wrote.

He was referring to the business model all too many dot.coms employed - to enrich investors through rising share prices rather than profits.

"The fact is that a bubble market has allowed the creation of bubble companies, entities designed more with an eye to making money off investors rather than for them."

Unglamorous purchases

Business models for these companies amounted to little more than "the old-fashioned chain letter", he added.

It is advice that could be expected from someone who looks for companies that are undervalued and promise long term profits growth.

Investors need only look at Berkshire's acquisitions in 2000 to get a clear idea of what Mr Buffett & Co view as value stocks.

For example, Berkshire's purchase of MidAmerican Energy, in a year that rewarded energy stocks as gas and oil prices surged in the US, shows why investors envy Mr Buffett's investing prowess.

Berkshire also bought Cort Business Services, which rents furniture to businesses.

Mr Buffett said Cort had all the right ingredients for a purchase: "a fine though unglamorous business, an outstanding manager and a price... that made sense."

Other acquisitions in 2000 included US Liability, an insurance company, boot and bricks maker Justin Industries, carpeting manufacturer Shaw Industries, Benjamin Moore Paint and Johns Manville, an insulation and roofing-products maker.

There was not a technology stock in the bunch.