Just because Berkshire Hathaway ( BRK.A) founder Warren Buffett is investing in a particular stock or sector, doesn't mean you should, too. In fact, experts say his recent forays into the telecommunications and energy sectors don't signal a vote of confidence for either group.

Buffett, who has traditionally ignored industries that he claims not to understand or which are going through rapid changes, has made two investments recently in Williams Cos. ( WMB) and one investment in Level 3 Communications ( LVLT) that contradict his ethos. The latter was particularly surprising to some because the competitive advantages of Level 3 aren't immediately clear.

Margin of Daring

In many ways though, the investments are consistent with Buffett's investment thesis. As Morningstar analyst Pat Dorsey points out, Geico was financially distressed when Berkshire first started acquiring shares in the mid 1970s, as was American Express ( AXP). Indeed, Buffett has ventured into questionable areas several times in the past and has proven to be enormously successful.

"He's buying cheap at distressed times from a distressed seller," said Andy Kilpatrick, a stockbroker in Birmingham, Ala., and author of Of Permanent Value: The Story of Warren Buffett.

Williams soared a whopping 319% last week amid rumors, and then an announcement that Berkshire and brokerage firm Lehman Brothers had extended $900 million of senior-secured credit to the struggling energy concern. Several analysts viewed the investment as a positive for the stock and the industry. But others, like Gimme Credit's Carol Levenson, believe Williams troubles are far from over.

"Bondholders should take advantage of the Omaha rally to exit this name, since we fear the company's situation remains precarious," she wrote in a research note recently.

For Buffett, the investment was a no-brainer. If Williams survives, he gets his money back plus interest. And if the company goes bankrupt, Buffett and Lehman get virtually all the oil and gas interests at Barrett Resources, which Williams bought last year for $2.6 billion.

"He's not buying the common stock. He's coming in with a special deal," said Kilpatrick. "If the company goes under, it's not like he's going to be left high and dry."

Special Interest

The loan was Buffett's second investment in Williams. In March, Berkshire announced that it would buy 1.47 million shares of convertible preferred stock for about $275 million. Berkshire also said last month that it would buy $100 million of convertible bonds from Level 3.

Level 3 has since zoomed 138% because some investors feel that the move was a show of support for Chairman Walter Scott, who also happens to be a member of Berkshire's board. Still, many experts note that $100 million is a fairly minor investment for Buffett.

In addition, convertible bonds are often bad news for existing shareholders. If and when the convertibles at Williams and Level 3 are turned into common stock, both companies will see their outstanding shares diluted.

While acting opportunistically, Berkshire isn't deliberately trying to hurt existing shareholders, of course. The convertible securities it has purchased are nothing like so called "death spiral convertibles" that some companies use to prey upon distressed companies.

In these circumstances, an investor typically offers cash to the firm in exchange for a percentage of the company. But the investor will also demand more shares and a greater percentage of the company if the value of the investment drops significantly. Toxic convertibles are often entered into by extremely desperate companies that cannot find funding elsewhere.

Dilution Solution

Kilpatrick argued that while Buffett's recent deals will dilute ownership, he is also saving the companies in some ways. "You could argue it both ways," he said.

The infusion of liquidity into Williams and Level 3 will no doubt offer some short-term relief. But investors should realize that the Buffett is not an ordinary investor and that the risks he has taken on aren't nearly as serious as the risks taken on by common shareholders who have recently pushed these firms' share prices sharply higher.

As for Buffett's next project, Kilpatrick said there are rumors that he may be looking into another beleaguered telecom firm Qwest ( Q), but he added that it is impossible to predict. Buffett has said himself that he is not actively looking for new opportunities but is considering those that cross his desk. "I don't even think he even he can predict it," Kilpatrick said. "It could be a stock in a foreign country, the stock market itself or a bond, you just never know."

Whatever Buffett does decide upon, Kilpatrick said Berkshire Hathaway is having a "phenomenal" year relative to the rest of the world. "Although the firm's book value is only up a few percentage points this year, the rest of the world is down 15 or 20 percentage points," he said. "When you beat the S&P 500 by one, two or three percentage points, you're Ivy League stuff."

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