Dot-com Bubble

Buffett wrote that the dot-com collapse had exposed how much of the reported profitability of the late 1990s had been an artifact of accounting and stock-based compensation rather than genuine cash generation. He argued that stock options, treated as free under accounting rules of the period, were a real economic cost to owners, and that any analysis of a business that ignored option dilution was describing a fictional company.

On the gap between reported and economic earnings after the bubble.

Buffett wrote that Berkshire would continue to invest only in businesses it understood, even if that meant underperforming a market inflating speculative valuations in businesses it did not understand. He argued that the test was not whether Berkshire had participated in whatever was rising fastest, but whether the businesses it owned continued to meet the standard of durable competitive advantage and reasonable price. He framed the bubble as a test of temperament rather than intellect.

On refusing to chase the dot-com boom.