204 AFTERWORD
In 1997, my fund was at the crossroads. If I continued to invest in
the traditional Buffett-like stocks, it was likely I would continue to gen-
erate just average results. Even Buffett was telling Berkshire Hathaway
shareholders they could no longer expect to earn the above-average in-
vestment gains the company had achieved in the past. I knew if I contin-
ued to own the same stocks Buffett owned in his portfolio at these
elevated prices, coupled with moderating economics, I was unlikely to
generate above-average investment results for my shareholders. And in
that case, what was the purpose? If a mutual fund cannot generate, over
time, investment results better than the broad market index, then its
shareholders would be better off in an index mutual fund.
Standing at the investment crossroads during this period was dra-
matic. There were questions about whether the fund should continue.
There were questions about whether Buffett could compete against the
newer industries and still provide above-average results. And there was
the meta-question of whether the whole philosophy of thinking about
stocks as businesses was a relevant approach when analyzing the newer
technology-oriented industries.
I knew in my heart that the Buffett approach to investing was still
valid. I knew without question that this business-analytical approach
would still provide the opportunity for investors to spot mispricing and
thus profit from the market’s narrower view. I knew all these things
and more, yet I momentarily hesitated at the shoreline, unable to cross
into the new economic landscape.
I was fortunate to become friends with Bill Miller when I f irst
began my career at Legg Mason. At the time, Bill was comanaging a
value fund with Ernie Kiehne. Bill periodically spent time with the
newer investment brokers sharing his thoughts about the stock market,
about companies, and ideas from the countless books he had read. After
I left Legg Mason to become a portfolio manager, Bill and I remained
friends. After The Warren Buffett Waywas published, we circled back
for more intense discussions about investing and the challenges of navi-
gating the economic landscape.
In the book, I pointed out that Buffett did not rely solely on low
P/E ratios to select stocks. The driving force in value creation was
owner earnings and a company’s ability to generate above-average
returns on capital. Sometimes a stock with a low P/E ratio did generate
cash and achieve high returns on capital and subsequently became a great
investment. Other times, a stock with a low P/E ratio consumed cash