Not Listening to Buffett Cost Me Thousands

Forbes recently ranked Berkshire Hathaway Chairman Warren Buffett as the second-richest man in the world, with an estimated net worth of $37 billion. Although his net worth has dropped by a cool $25 billion over the past 12 months, it's still an impressive haul.

Although some people have recently questioned his judgment, Buffett is still almost universally accepted as one of the world's greatest stock market investors. When he talks, it pays to listen.

The Oracle is commonly considered a value investor, but he seems just as focused on growth. Either way, he has proved 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 Coca-Cola, Wells Fargo (NYSE: WFC  ) , and American Express (NYSE: AXP  ) , all of which are current Berkshire investments, either through common stock holdings or fixed-income securities.

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: "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 IPO in August 2004, 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 rapidly, continuing to take market share, and building sustainable competitive advantages in its enterprising culture, superior advertising platform, and brand loyalty. Given its growth rate ever 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 -- and 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 that the textile-manufacturing business Berkshire operated was in a declining industry, he was enticed to buy because the price looked cheap. The Berkshire of today wouldn't exist without that original purchase, but Buffett reluctantly closed the textile business in 1985.

And that brings to mind 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 Palm (Nasdaq: PALM  ) , Ford (NYSE: F  ) , Abercrombie & Fitch (NYSE: ANF  ) , Motorola (NYSE: MOT  ) , and even Las Vegas Sands (NYSE: LVS  ) -- all of which appear relatively cheap but operate in intensely competitive industries and/or carry plenty of debt.

Twenty 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 Gardner 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 41 percentage points on average. If you'd like to learn more about their latest stock picks and five favorite ideas for new money, give it 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 owns shares of Berkshire Hathaway, a recommendation of Motley Fool Stock Advisor and of Inside Value. The Motley Fool also owns shares of American Express, an Inside Value recommendation. Coca-Cola is also an Inside Value recommendation. Google is a Rule Breakers pick. The Motley Fool's disclosure policy is enlightening.

Read/Post Comments (5) | Recommend This Article (17)

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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 May 02, 2009, at 10:10 AM, prginww wrote:

    should of bought LVS with bethlehem PA opening may22 and singapore which will be the king of casinos in dec-08. you guys at motley fools are always behind the run. constantly bashing a stock with out doing your DD. i see so many times you repost old articles that are so negative on LVS.

    that is why i quit my subscription. you are such mpel pumpers its pita-full. your no better then cramer and your stock picks are mostly wrong. good luck. you will need it. proberly will kill this post cause your paying subs % have dropped drastically.

  • Report this Comment On May 02, 2009, at 12:29 PM, prginww wrote:

    It is right time to this group with their recomendaion get off. I made research on their advisors and recognized that they had never said and admitted their wrong recomendation. For ex. They always said bad the gaming sections last 2, 3 months with concentrating on these gaming debts, but they do not know or hide information that there are alot of fortunes in these. Billionaires are more comfortable to feed money to these bacause they could get returning quick even in an econimic downturn comparing to other sections. I think this group want to buy cheap on gaming sections or they had alot of short sell on these and would like to compensate on their misfortune or they want our economics more woes hic hic , so they try to stir investers with bad news to follow .... It is time to stop making money by beating a particular stock using your emails with bad analyzing hic hic

  • Report this Comment On May 02, 2009, at 1:33 PM, prginww wrote:

    Simple, bought palm 3.10 hum, bought ford 2.15 hum....the greatest risk is not taking one. Thanks

  • Report this Comment On May 03, 2009, at 1:20 AM, prginww wrote:

    CEO and his wife of LVS own 52% shares, they aren't selling why should I. Will gambling be gone? Will Recession last forever? Investing is gambling too only people with "value" information or insider information then it is investing. Others know nothing about a company or companies and still betting on a company or companies it is gambling. I bought LVS at $3 something and I will hold because I believe in "Vegas".

  • Report this Comment On May 04, 2009, at 2:24 AM, prginww wrote:

    As usual, you find a way to bash LVS almost daily. Even though the article has absolutely nothing to do with LVS, you guys still manage to throw the knife in their back. It's almost comical how many times you guys do this. As usual, you're wrong. You say you ALMOST bought LVS, but never did. Well, thankfully I DID buy it, and have made a bundle riding it up from the $3's until now at $8. After a million articles stabbing LVS in the back, this "Trash Stock" keeps going up. It's blatantly obvious you guys must be short LVS, but you're trash talking isn't working. Maybe it's time to admit you're wrong, but you'll probably wait until it's at $40 (which will be sooner than you think).

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