Not Listening to Buffett Cost Me Thousands

During the first half of 2008, Berkshire Hathaway Chairman Warren Buffett was ranked by Forbes as the richest man in the world, with an estimated net worth of $62 billion. He's amassed that fortune entirely through investing.

Following the credit crisis and the stock market dive, he's probably worth a bit less by now, but what's a few billion when you've got that much money? Regardless of his exact current wealth, Buffett's almost universally accepted as the world's greatest stock market investor. When he talks, it pays to listen.

Though Buffett is commonly considered a value investor, he seems just as focused on growth. Either way, he's proven that he's an intelligent investor. As Buffett's sidekick Charlie Munger once said, "All intelligent investing is value investing."

Google as a value stock
Buffett focuses on companies with favorable long-term economics and strong competitive advantages -- companies such as current Berkshire holdings General Electric (NYSE: GE  ) , Goldman Sachs (NYSE: GS  ) , Coca-Cola, and Wal-Mart (NYSE: WMT  ) .

One Wall Street analyst called Coca-Cola "very expensive" around the time Buffett started buying it. It wasn't a typical value stock. But as Buffett once said about Coca-Cola: "If you gave me $100 billion and said, take away the soft drink leadership of Coca-Cola in the world, I'd give it back to you and say it can't be done."

Now that's a competitive advantage.

See, value investing is not all about buying stocks with low price-to-earnings, price-to-book, or price-to-sales ratios. Far from it.

For example, Google would have been a great value stock at its August 2004 IPO, despite selling at the time for more than 100 times earnings.

A value stock trading for more than 100 times earnings? Yep. Google was growing fast, continuing to take market share, and building sustainable competitive advantages in its enterprising culture, superior advertising platform, and brand loyalty. Given its growth rate since, and its powerful business model, it was underpriced back then.

Investing shock: Buffett was wrong
Buffett didn't buy Google. Sadly, neither did I -- a decision that has cost me thousands.

I held off on buying Google shares because they seemed expensive. I knew it owned the vast majority of the search market share, and had both a great corporate culture and innovative leaders. But I couldn't get past that lofty P/E ratio.

Instead, I was concentrating on buying poor companies on the cheap. These trash stocks, as I call them, have a nasty habit of getting even cheaper -- sometimes even going bust.

At least I'm not alone in buying "trash stocks." In his 1989 letter to Berkshire Hathaway shareholders, Buffett himself admitted to similar crimes. In a section of the letter called "Mistakes of the First Twenty-Five Years (A Condensed Version)," Buffett says he never should have bought control of the textile company Berkshire Hathaway.

Why? Even though he knew the textile manufacturing business Berkshire operated was in a declining industry, he was enticed to buy because the price looked cheap. While the Berkshire of today wouldn't exist without that original purchase, Buffett reluctantly closed the textile business in 1985.

Which reiterates a timeless Buffett-ism: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Value investing for suckers
I'm a great fan of Warren Buffett and like to think of myself as a value investor. But too often I've been guilty of buying those "trash stocks" -- cheap stocks with mediocre (or worse) businesses.

Although I've never owned them, over the years, I've come close to buying shares in Caterpillar (NYSE: CAT  ) , Marriott International (NYSE: MAR  ) , Yahoo! (Nasdaq: YHOO  ) , and even First Solar (Nasdaq: FLSR  ) -- all of which appear relatively cheap, but which operate in intensely competitive industries, and/or carry plenty of debt.

Nineteen years have passed since that famous 1989 letter to Berkshire Hathaway investors. As I review my portfolio today, I see fewer and fewer "trash stocks."

Through a combination of expensive errors, experience, and a commitment to continued investing education, I've slowly come to realize that the best long-term investments are in companies in growing industries that possess long-term, sustainable competitive advantages.

A heady combination of value and growth investing
If you need stock ideas today, there are more than a few such companies among our recommendations at Motley Fool Stock Advisor. I've known Fool co-founders and Stock Advisor advisors David and Tom for more than a decade now, and both are intelligent, business-focused investors.

Since the newsletter's inception in April 2002, their recommendations have outperformed the market by more than 25 percentage points, and are in positive territory while the S&P 500 is in negative territory. If you'd like to learn more about their latest stock picks and five favorite ideas for new money, give Stock Advisor a try free for the next 30 days.

I wish you happy, trash-free investing.

This article was first published on March 7, 2008. It has been updated.

Bruce Jackson finds taking out the trash satisfying. He is a beneficial owner of Berkshire Hathaway shares. The Motley Fool also owns shares of Berkshire Hathaway. Berkshire is a recommendation of Motley Fool Stock Advisor and Inside Value. Coca-Cola and Wal Mart are also Inside Value recommendations. Google is a Rule Breakers pick. The Motley Fool's disclosure policy is enlightening.


Read/Post Comments (9) | Recommend This Article (27)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 29, 2008, at 6:37 PM, sarcastro999 wrote:

    All hail Warren Buffett, and Berkshire's 50% decline earlier this month. I know, I know, he is a "long-term" investor. Guess that means the rest of us are just day-traders, so we need to be held to a different standard than he...

  • Report this Comment On November 30, 2008, at 5:15 AM, steven107 wrote:

    You all are way too infatuated with Warren, reminds me of Cool Hand Luke: "...stop feeding on me!...".

    You would be doing many of us a favor, and maybe even the longterm namebranding of your company if you would stop using him to "sell" your articles. You mention his name more than motley fool.

    It's probable that a case could be made for legal misuse of his name and branding as often as you use it.

    "invest like buffett, here is what I think he would buy", "what buffett would do if he were me", "this company is berkshirelike", "why buffett bought this stock", "what buffett was thinking while sitting on the commode".

    As much as i'm tiring of seeing every other article you have having buffett in there, I like that better than the horrible sales brochure articles titled like this: "make a gazillion dollars by investing in this stock", "3 stocks for the century", "read this to be a bazillion bagger stock owner", they all have nothing but filler in them with multiple random company refferences to get them well placed in the business news universe, while the end of the article is please pay us money. It's the same thing as beggar-ing. Hold out the tin can and i'll maybe i'll toss you a nickel, but stop hitting us all up every single time.

  • Report this Comment On November 30, 2008, at 6:00 AM, TicoHombre wrote:

    Buffett is arguably the greatest investor of the 20th century. Will wait another 92 years before extending that honor to the 21st century.

    I am glad the MF turned me on to him, and I can't think of a better mentor to study than him. And since your credentials are pretty well unknown, I guess I'll take the constant MF Buffett comparisons over your rant any day.

    Now, as to the second half of your rant, you are in good company.

    TH

  • Report this Comment On November 30, 2008, at 7:23 AM, riley2379 wrote:

    Sarcastro999,

    What does the recent decline in Berkshire have to do with Buffett's abilities? It was mainly due to misunderstanding of a derivative deal and probably margin calls.

  • Report this Comment On December 01, 2008, at 12:26 AM, redneckdemon wrote:

    From what I can see, his company goes up, and his company goes down. How much is it worth after a 50% loss? More than I'll ever have, that is for sure. I figure anyone who can make over a billion might be worth listening to. If they can continue to use that cash to make more without going bust for over 20 years, they have my attention.

    I agree that we see his name a little too often here, and that the sales articles are annoying as hell, but that's no reason to bash on Buffett. If you can't do better, shut up and take notes.

  • Report this Comment On December 01, 2008, at 5:50 AM, sarcastro999 wrote:

    riley2379,

    More than anything, it was just a sarcastic (no pun intended) reaction to the CONSTANT Buffett-praise we see throught the financial (and even regular) media, especially on this site. Yes, he deserves his due. He was arguably one of the greatest long-term investors in the latter part of the 20th century, blah blah. But I think steven107's comment sums it up very nicely.

    Bottom line- Warren Buffett has made LOTS of mistakes this year. There are experts who have gotten it FAR closer to what has happened than WB, yet we ALWAYS hear about how we should have listened to Buffett, how he's a "long-term" investor, etc. etc.. The fawning, unchecked coverage has outdone even Obama, who has his detractors on the right (most of whom, sadly, are just hacks, but at least they exist). Yes, we are ALL entitled to mistakes, but we should be held accountable for them. And no more of this, "Well, Buffett's in it for the long term," nonsense- as if the rest of us are all just slot jockeys...

  • Report this Comment On December 01, 2008, at 12:09 PM, steven107 wrote:

    Thought I'd make more clear, thought it was obvious. I'm not dissing Buffett, just saying that the Fools are abusing the man, and arguably they are also 'using' him.

  • Report this Comment On December 01, 2008, at 12:21 PM, TicoHombre wrote:

    Riley wrote: "Bottom line- Warren Buffett has made LOTS of mistakes this year."

    I'm sorry, you're judging his success or failure over a period of how many DAYS????

    The short-term thinking manifested here is incredible!!! Come back in a few years and tell me whether they were mistakes. I don't know if they are or not. I'll assume not, but I'll not presume to judge them as "mistakes" or "successes" within the time span of a few days, weeks months, or yes, even a few years.

    Those who dare to judge Buffett's last few deals as "mistakes" are clearly traders, not investors.

    TH

  • Report this Comment On December 01, 2008, at 1:54 PM, wiserefool wrote:

    The problem with companies like Marriott is not their competitive environment, it is the incredible stupidity of their management. Just compare Marriott Q2 earnings call to what they said in Q3, major retards, unbelievable.

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