A shareholder put this question to Warren Buffett back in April 2000 at Berkshire Hathaway’s annual meeting in Omaha.
From mid-1998 to the top of the dotcom bubble in spring 2000, shares in Berkshire Hathaway fell 47%, while the Nasdaq rose 166%.
In 1999 alone, Berkshire’s A shares fell 23%, while the broad S&P 500 index returned around 20%. The Nasdaq was up 85.6%.
Shareholders insinuated that he had gone senile, the press hung him out to dry, and the newly rich dotcom billionaires laughed at him.
This blog post is about how Warren Buffett handled a period when he performed massively worse than the market, and what you can learn from it.
Why now?
Well, we see a lot of the same today, with AI companies pulling the whole market up, while most other companies stand still or fall.
Under Pressure in the Dotcom Bubble
It can’t have been easy to be Warren Buffett during the dotcom bubble.
In December 1999, Barron’s ran an article titled “What’s Wrong, Warren?”.
The article’s first sentence says that Warren Buffett has probably lost his “magic touch”.
It goes on to compare Berkshire Hathaway with Yahoo.
During the dotcom bubble, Yahoo overtook Berkshire Hathaway in market value.
In December 1999, Yahoo’s market value was 120 billion dollars, while Berkshire (BRK) was worth 83 billion.
But Warren Buffett had the last laugh, and in hindsight it’s Barron’s article that looks ridiculous, not Warren Buffett.
Today Berkshire is worth over 1 trillion dollars, and Yahoo was sold in 2017 for 4.5 billion.
It was probably not Barron’s proudest moment, but it was hard to see in the midst of the frenzy of the dotcom bubble.
The Fool at Sun Valley
In July 1999, Buffett gave the closing speech at the Sun Valley conference in Idaho.
It is a very prestigious event with the richest and most powerful leaders in the US.
In 1999, the new internet billionaires came flying in on private jets and talked in big words, with shiny PowerPoints, about the golden future of the internet.
Warren Buffett gave a sober speech about how prices had run far ahead of what the economy could bear, and warned that it couldn’t go on.
Many in the room thought he was a relic who didn’t understand what was coming.
Less than a year later the dotcom bubble burst, and the whole development turned quite quickly.
Three years after the top of the dotcom bubble, Berkshire was up 56%, while the Nasdaq was down 74%.
The Dotcom Bubble and the AI Bubble Resemble Each Other
They say history rhymes.
The pattern at least looks to be the same.
Shares in AI companies with huge losses have risen enormously (though they have also fallen just recently), while shares in ordinary companies that sell perfectly ordinary things like clothes and food, and that have growth and profits, are falling.
The big indexes have shot up this year.
It looks as if everything is fine.
But wait until we scratch the surface a bit.
The broad S&P 500 index is close to its record.
From the start of 2024 to the end of September 2026, the S&P 500 rose about 66%.
A basket of 47 AI companies accounted for 60% of that rise.
The ten largest companies accounted for 40% of the index.
So if you think you have diversification or risk spreading by investing in the big indexes, think again.
How are the other companies doing?
The ones that have nothing to do with AI?
Well, the business is doing fine, but the share price is doing badly.
Most of them (59%) have fallen at least 20% from their peak. And one in six (17%) has more than halved its share price.
So why is the index so high?
Because a small group of AI companies is pulling everything up.
Since the end of 2022 they have risen more than 300%.
So if you own perfectly ordinary companies, you might right now feel like Warren Buffett in Sun Valley in 1999.
Like the one everyone looks at as the old, senile fool. Perhaps you are starting to doubt your own ability to find companies?
Wait, there is hope. Let’s look at how Warren Buffett handled it.
How did Warren Buffett protect himself? How did he stay so calm?
Buffett Built Walls Around His Judgment.
He ran a huge investment business from Omaha, far from the noise of Wall Street.
But the most important wall was money.
Berkshire owns insurance companies. And he invests the premiums the insurance companies receive.
Policyholders can’t demand their money back just because the market falls.
Compare that with an ordinary fund manager.
When the market falls 20 or 30%, investors get nervous and pull their money out.
The manager is forced to sell exactly where he should be buying.
Buffett removed that whole mechanism from his life before it could ever hit him.
He Lived by an Inner Yardstick.
Buffett is not so preoccupied with what other people do.
He doesn’t measure himself against others.
As he himself says: he follows his inner scorecard.
As he has asked the audience rhetorically at the annual meeting:
“Would you rather be known as an Italian lover and be a bad lover, or be known as a bad lover and be an Italian lover?”
While the whole market was intoxicated by technology, he sat quietly on the sidelines and said almost nothing in his own defense, because he knew he was doing the right thing.
He Looks at the Company, Not the Price.
He felt richer or poorer based on what the companies earned, not on what the price said that week.
When the price is not your yardstick, a falling market hurts much less.
The Key Takeaways
Most of us can’t build an insurance company or move to Omaha.
But we can build a small version of those walls.
You can follow these steps:
1. Invest in companies you understand
Do you understand the product? Do you understand the market?
Put the company through a checklist. You can download mine here.
2. Figure out where the company will be in ten years
Are you fairly sure the company will still exist and be growing in ten years? If not, put it away again.
3. Calculate what it is worth
Find out what the company is worth. Because value and price don’t always go together. That is, the share price runs away in both directions from what the company is actually worth.
Only invest when the share price falls below that value, so that you have a margin of safety.
4. Don’t invest money you will need soon.
You probably have no investors who can pull out. But you don’t have the cash flow of an insurance business either.
You have your own nervousness to deal with.
Make sure you have enough money for day-to-day life, so you don’t have to sell in a falling market.
Maybe you can even have extra to invest when it falls.
5. Notice your reaction.
If you get stressed from listening to a particular podcast, then turn it off.
Stop following news that makes you more nervous.
Notice what happens inside you when everyone else is convinced you are wrong. Protect your own peace.
Buffett’s Answer to the Dotcom Mania
How did Warren Buffett actually react to the question of whether he had enough brain cells?
He sat completely calm while the room gasped and Charlie Munger giggled beside him.
Here is what he answered.
“We will never buy anything we don’t think we understand, and the definition of understanding is thinking we have a reasonable probability to assess where the business will be in 10 years.”
He said a bit more.
You can see the question and his full answer on my YouTube channel here.
