Head: (5 of 5)
Heart: (3.5 of 5)
Leadership Applicability: (4.5 of 5)

In 1991, Warren Buffett was the second richest man in the United States; his investment company's book value had grown by more than 23 percent for a year for 26 years. His personal net worth was $3.8 billion. He was one of the most respected businessmen in the world. But after long telling his children "it takes a lifetime to build a reputation and five minutes to ruin it," his reputation was suddenly on the line. The trading floor at the "King of Wall Street," Salomon Brothers, had run amok and one rogue trader had defied federal restrictions to try to corner the market on treasury securities, creating a scandal that could have led the firm straight to bankruptcy.  

Buffett had invested 700 million dollars-the largest amount to date he had ever invested in a single company-in Salomon in September of 1987, even though it was a testosterone-heavy, debt-loaded bank of the type he had long scorned on Wall Street. He had invested in part because it was about to succumb to a hostile takeover, and so gave its "white knight" very favorable terms. More important to him was the fact that he really liked and believed in Chairman John Gutfreund. When the scandal broke, Gutfreund resigned, and Buffett, who had always preferred to work alone from Omaha, relying on a network of collaborators and proxies but directly supervising very few, was suddenly called in to run the company. He was terrified.

"To do so he would have to extend the umbrella of his reputation, already at risk, even further to protect the firm. There was no way to avoid this challenge," writes Alice Schroeder, author of Buffett's extremely comprehensive, equally fascinating, 838-page authorized biography.  "For once, nobody could be his proxy. Only he could save Salomon. And if he walked away, the odds were high that Salomon would implode...Buffett could be a hero or he could fail. But he could not hide and he could not duck."

Buffett did step in as chairman and save the day, by following what he had always called his "inner scorecard."  His first tense assignment was to try to repair the firm's relationship with the Treasury and the SEC; after a day of extraordinary humility, cooperation, and even begging on his part, he convinced the regulators that a bankrupt Solomon would not be good for the economy, and they partially rescinded their trading ban, keeping the stock from tanking. With bankruptcy at bay, he turned to internal problems.  He did not bow to immediate internal pressure to fire the boss of the rogue trader, but let him come to his own decision to resign.  He listened to many parties, seeking to fully understand what had happened.  When he had to hire a new CEO, he asked each of ten candidates who they thought was the most qualified, and selected their unanimous decision. He spoke directly and honestly to both reporters and employees about Salomon's problems, and the culture that had created them. Then he set to work on changing that culture: Buffett was determined that whatever was wrong at Salomon be found, confessed, and fixed, as soon as possible.

Buffet has relied on this "inner scorecard" from the time he was a precocious child running multiple businesses including a paper route, selling "refurbished" golf balls, digging tossed tickets out from under the bleachers at the race tracks, and installing pinball machines in barber shops. He compares himself to people who use an "outer scorecard," people who were always comparing themselves to others or seeking others' approval.  And it is true, he is an extremely independent and unique thinker on the topics he knew best-his "personal core competencies" - money, odds, brick-and-mortar businesses, and of course, stocks. After studying under, befriending, and then pestering his mentor Ben Graham until Graham finally gave him a job, he soon was deviating from Graham's strictly statistical analysis of looking for stocks that were undervalued in relation to what the companies would be worth if liquidated.  Graham favored buying small amounts and diversifying, while Buffett, from the beginning, trusted his own instincts to find a few companies in which to concentrate. 

Another core competency of Buffett's is finding and cultivating long-term, mutually beneficial relationships with other like-minded men who are also good at money, business and stocks. Indeed, many of his best investments were first identified by one or another of his collaborators, and he often sent the people he trusted most to bring flailing companies around that he'd bought on the cheap.  His management style, except for crucial situations like with Solomon, is hands-off and simple: "he tells the managers of the company he owns to run the business as if they are its sole owner; it is the only asset they hold; and they can never sell or merge it for one hundred years."  In looking for companies to buy he looks for solid earning potential, long-term growth over short-term earnings, and nothing that he can't understand, such as high technology, or doesn't want to deal with, such as big people problems.

It was his relationships with women, children and other family members that he did not tend so well.  He was an absent father and husband, even as he worked from home - he stumbled around almost as in a daze, focusing on the Wall Street Journal while children played around him.  He relied on his wife, and later his mistress (with his wife's blessing, since she had moved away to California), to do everything from dress him to feed him to make all social arrangements.  He was notoriously skimpy in giving money to his wife, children, or charity in the earlier days of amassing his snowball, reasoning that he could make a lot more money to give them later.  In his elder years he has softened, giving bigger gifts of money to family and deciding to leave most of his fortune in the care of Bill and Melinda Gates' foundation. 

In the end, Buffett's brand of fearlessness translates directly to his independence, focus, and willingness to follow his inner core beliefs. Commitments to him are so sacred "that they should be rare," allies are important, grandstanding is counter-protective; protect your reputation at all costs and always do what you think is the right thing, even if nobody else in the world seems to agree with you. This was put to the test in the last two stock bubbles, when the financial press discounted him as an old fogey and other investors hounded him for not joining in the tech stock rallies. He just kept saying, I know it's going to crash, I just don't know when. So he bided his time, ignoring the criticism, and saved his cash to buy at the bottom. He is the true embodiment of the phrase, from crisis comes opportunity.  Buy it.