Investing in Fixed-Income Securities 147Of the total, 65 percent were in the energy industry and about $7 bil-
lion were bought through Berkshire insurance companies.
Describing his thinking in the 2002 letter to shareholders, Buffett
wrote, “The Berkshire management does not believe the credit risks as-
sociated with the issuers of these instruments has correspondingly de-
clined.” And this comes from a man who does not take unaccounted-for
(read: unpriced ) risks. To that point, he added, “Charlie and I detest tak-
ing even small risks unless we feel we are being adequately compensated
for doing so. About as far as we will go down that path is to occasionally
eat cottage cheese a day after the expiration date on the carton.”^5
In addition to pricing his risk, he also typically bought the securi-
ties at far less than what they were worth, even at distressed prices, and
waited until the asset value was realized.
What is particularly intriguing about these bond purchases is that, in
all likelihood, Buffett would not have bought equity in many of these
companies. By the end of 2003, however, his high-yield investments paid
off to the tune of about $1.3 billion, while net income for the company
that year was a total of $8.3 billion. As the high-yield market skyrock-
eted, some of the bonds were called or sold. Buffett’s comment at the
time was simply, “Yesterday’s weeds are being priced as today’s f lowers.”
In July 2002, three companies invested a total of $500 million in
Broomf ield, Colorado-based Level 3 Communications’ ten-year con-
vertible bonds, with a coupon of 9 percent and a conversion price of
$3.41, to help the company make acquisitions and to enhance the com-
pany’s capital position. The three were Berkshire Hathaway ($100 mil-
lion), Legg Mason ($100 million) and Longleaf Partners ($300 million).
Technology-intensive companies are not Buffett’s normal acquisition
fare; he candidly admits he does not know of a way to properly value
technology companies. This was an expensive deal for Level 3 but it gave
them the cash and credibility when they needed it. For his part, Buffett
obtained a lucrative (9 percent) investment with an equity position. At
the time, Buffett was quoted as saying that investors should expect 7 to 8
percent returns from the stock market annually, so at 9 percent, he was
ahead of the game.
There is another aspect to this story that is typical of Buffett—a
strong component of managerial integrity and personal relationships.
Level 3 Communications was a spin-off from an Omaha-based con-
struction company, Peter Kiewit Sons; Buffett’s friend Walter Scott Jr.,
is both chairman emeritus of Kiewit and chairman of Level 3. Often