Comeback Crusader

By Daniel Kadlec Sunday, Mar. 02, 2003
    • ILLUSTRATION FOR TIME BY THOMAS FLUHARTY

    During investment banker Herb Allen's annual gathering for media moguls in Sun Valley, Idaho, last July — when locals were paid $20 an hour just to be available for baby sitting — Coca-Cola CEO Douglas Daft at one point turned for advice to investment legend Warren Buffett, who sits on Coke's board. What would happen, Daft wondered, if Coke suddenly stopped giving Wall Street quarterly earnings estimates? Buffett answered that Coke's shares would be more volatile and some investors would sell but that these were prices worth paying. Daft would forever "be free from that fiction," Buffett said, according to someone close to both men, and better able to focus on long-term goals. That did it for Daft. This past December, Coke made it official: no more advance earnings estimates. A month later, McDonald's followed suit, and a few days after that, AT&T; made it a trend.

    People are listening to the Sage of Omaha again. The man whom many consider to be the greatest investor of all time — Buffett once raised $210,000 at a charity auction for his 20-year-old wallet, with a stock tip inside — fell into disfavor in the late '90s. He was criticized for avoiding tech shares when they were soaring, and for clinging to big positions in stocks like Coke and Gillette after they had peaked and were driving down the market value of his company, Berkshire Hathaway.


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    But now Buffett, 72, is on a comeback. By avoiding fads and sticking to what he knows, the Nebraska native is finding ways to make money in a bear market that has ravaged many fortunes. His long-held stake in the Washington Post Co. has sparkled during the market downturn, and over the 30 years that Buffett has owned the stock he has turned an $11 million investment into $1.2 billion. More recently, he has been snapping up steady cash-producing private businesses like kitchen retailer The Pampered Chef.

    Beyond adding to a personal wealth estimated at $30.5 billion — second only to Bill Gates'--Buffett is a man on a mission. He has been agitating for publicly traded companies to clean up their management, and this Saturday he will take that crusade up several notches in his eagerly anticipated annual letter to shareholders. Long a must-read among investors and executives, Buffett's folksy, insightful yearly musings on business and finance carry added credibility today, thanks to his early warnings about the dangers of overpriced stocks, gimmicky accounting and other new-era traps.

    Much of Buffett's letter, to be released on his firm's website (berkshirehathaway. com), will expound on corporate reforms needed in the wake of scandals at the likes of Enron, Tyco and WorldCom. He will probably urge that boards hire independent directors who will ask tough questions and curb excessive executive pay. He will call on CEOs to focus more on the long term and provide investors with clear, complete and timely information.

    Buffett will touch on what has long made his letter popular: how he is deploying Berkshire's $75 billion investment portfolio. He's less interested than he used to be in common stocks; he apparently finds their prices too high. Instead he's dabbling in junk bonds and acquiring private assets that range from apparel makers to gas pipelines. Buffett's book is no longer the model it once was: the investments he favors these days — specially constructed bonds and convertible preferred stock and private companies — aren't available to most investors. But they offer a clue as to how he views the investment landscape.

    Most investors will appreciate Buffett's generalship of the battle for stronger measures to restore corner-office accountability and stock-market confidence. His penchant for keeping things simple is legendary, and the need for reform remains acute. Just last week two former executives at Kmart were charged with manipulating earnings (their lawyer says the prosecution is "wrong and unjust"), while Dutch retailer Ahold owned up to faulty bookkeeping at a U.S. subsidiary and restated the past two years' earnings, slashing them $500 million.

    The last time Buffett took on "corporate governance" was in his 1993 report, in which he focused on the need for companies to hire outside directors for their business savvy, not "because they are prominent or add diversity," and asserted that directors must have the spine to root out unethical behavior and take their concerns directly to shareholders — or resign, if entrenched directors balk.

    His biggest impact, though, has come fairly recently. A good example is Wall Street earnings guidance, the issue on which Coke just got real. Some 95% of public companies still provide guidance. But in part because of Buffett's stand, the trickle of dissenters is growing. A cynic might note that this trickle consists mainly of companies that have struggled in recent years. Mickey D's, Ma Bell and Coke may simply be taking Mother's advice: If you can't say something nice, say nothing at all. But others are sure to fall in line. Buffett has long asserted that spoon-feeding analysts quarterly guidance puts undue focus on short-term results and leads companies to avoid prudent risks that probably would pay off over time.

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