On Tuesday, The Wall Street Journal ran a story discussing the rehabilitation of "Warren Buffett -- stock genius" in a story titled "Buffett Rides High Again Despite Bear Market." Shares of Buffet's company, Berkshire Hathaway (NYSE: BRK.A), have risen dramatically this year while many equities have swooned, prompting many people to take a new interest in Buffett and his operational and analytical processes. No longer are people exhorting Buffett to "buy something in technology," and his preference for boring, easy-to-understand businesses is once again considered to be genius rather than anachronistic.

What people are missing is that a little more than a year ago, when the financial media couldn't find a nice thing to say about Berkshire Hathaway, we all had an opportunity to buy one of the world's great businesses at fire-sale prices. Now that Berkshire's value has increased some 80% from its February lows, it seems safe to say 1999 and 2000 represented not the end of a remarkable run for Buffett, but a magnificent opportunity missed by most of the rest of us. Kick the world's greatest investor because his stock is down? That makes sense.

There are plenty of places where informed investors can be critical of both Buffett and his methods, and I'm sure the man who has everything would be first to admit that he could use one or two fewer sycophants. But it does seem quite funny that an august publication like the Journal would let that headline slide by without recognizing that Buffett himself said nearly 50 years ago that his investors should not expect results to outperform the major indices in times of great stock market euphoria.

Here's something else Buffett said many years ago that still holds true today: "Virtually all surprises in insurance are unpleasant ones." Part of the reason Berkshire's performance in 1999 and 2000 was so bad was that 1999 was the worst year in a generation for supercatastrophe insurers. Berkshire Hathaway generates more than 60% of its revenue from insurance operations, and the horrible 1999 year came directly on the heels of Berkshire's largest-ever acquisition, that of reinsurance giant General Re.

All the while that Berkshire stock was down, you never heard Buffett mention it. He doesn't "defend" his stock. He doesn't care at all what Wall Street thinks about it. As a result, he can make decisions other companies that play the kowtow game cannot. He has built Berkshire Hathaway to be disaster-resistant. As such, the market has generally looked at the terrorist attacks on the U.S. to be a net opportunity for Berkshire, despite the fact that the company has announced that it estimates losses relating to Sept. 11 to be in the range of $2.2 billion, among the highest of any insurance company.

It is perhaps distasteful to frame an event that involved such massive loss of life as a business opportunity, but insurers -- and, specifically, reinsurers -- deal in the realm of catastrophe. With the massive exposure insurance companies have to the World Trade Center, owners in these public companies must look at this event as a reality of business.

So how in the world is it that an announced $2.2 billion loss could turn out neutral, or better, for Berkshire Hathaway? The answer comes from both Buffett's preference for sound business decisions over quarterly appearances, and the fact that Berkshire has been built to withstand disaster despite the $14 billion in revenues it generates annually writing policies to cover others in the event of it. If only 5% of the stewards of public companies figured out the wisdom of operating this way, Buffett would not seem like such a genius, because he would not be such an obvious outlier.

The benefit of lumpy earnings
I would suspect that insurance -- particularly such long-tail varieties as supercatastrophe coverage -- are particularly suited to someone who is comfortable making decisions on their long-term benefits alone. The "surprise" factor in this type of insurance virtually guarantees that earnings are going to reflect events far outside the control of the company in a given quarter. Even in this realm, however, there are things companies do to try to look better, such as showing consistent or rising premium intake, rather than writing policies only when it makes economic sense to do so.

Berkshire's $2.2 billion in exposure to the World Trade Center collapse, and the company's statement that this represents somewhere between 3% and 5% of all anticipated insurance losses, would put the total loss in the range of between $44 billion and $73 billion, higher than other insurance executives currently estimate. Other executives have openly complained that Berkshire is overstating its losses to make them look bad. Ah, but look bad to whom?

Wall Street, the same beast with whom Buffett refuses to play. It is of course possible that this is the case, but it is more likely that we will see other companies' exposure estimates revised upward over time. By doing so, they can have quarterly earnings that look better and add in loss reserves later on to spread the pain out.

Berkshire, on the other hand, will take a $2.2 billion hit this quarter. It will make the quarterly results look horrible, but Berkshire shareholders will not have to worry about future surprises from this event. In fact, they will benefit as a result.

First, Berkshire will be able to immediately take advantage of the losses by balancing them against current earnings from all of its other operating companies, so Berkshire's exposure after-tax will be trimmed to $1.4 billion. Moreover, some of these claims will not be paid anytime soon, so even though the net losses will have already been recorded, at least a portion of the cash will remain in Berkshire's bank account. (It will simply carry a liability on the balance sheet. That portion of Berkshire's $36 billion in liquid asset base will remain available for Buffett's use, even though it will be balanced by a liability.

The standards get higher
Should the loss figure for the World Trade Center creep toward Buffett's high-end $73 billion estimate, furthermore, many smaller insurers will be unable to pay. Berkshire's balance sheet strength, meanwhile, means it can sustain the loss from the World Trade Center and several other supercatastrophes simultaneously -- and still pay claims quickly.

This balance sheet health comes partially from the spectacular returns on Berkshire's investments, and partially from its discipline in refusing to write policies when the economics were bad. Insurance and reinsurance premiums have already skyrocketed, in some cases more than doubling, but customers have also become pickier about the companies with whom they will work.

The World Trade Center attacks are an actuarial nightmare. Since insurers work in a complicated world of mathematical probability, an outlying single event gives them nothing to work with with regard to price coverage. Already many insurance companies have told customers they are not covered for terrorist attacks. Berkshire's willingness to take on enormous policy risk where it is confident in its ability to write it profitably will give it a decided competitive advantage over most other insurers: In reinsurance, only Swiss Re and Munich Re come close.

Buffett's probably got it right, though. Berkshire Hathaway lost an enormous amount of money, and its improved competitive advantage may not make up the difference. Why, then, has Berkshire stock risen so quickly since Sept. 11 ?

First of all, Berkshire has always been built to withstand catastrophic loss, and unfortunately we have just seen a tragic reinforcement of this. Second, Buffett has long warned that a disaster of this size, if not of this scale of human tragedy, was bound to happen. It has to go without saying that his company has been constructed not only to withstand such a loss, but also to be one of the biggest beneficiaries in business once one has taken place.

With the dramatic rise in reinsurance premiums, Berkshire's $14 billion annual book must rise only slightly more than 10% in order to make up its losses from the World Trade Center collapse in a single year. Buffett is certainly horrified by the attacks, but he built his company with the expectation that such a disaster would befall us at some point. No amount of pandering to analysts over the years would have put his company in a better position to do so.

Fool on!

Bill Mann, TMFOtter on the Fool discussion boards