Not Listening to Buffett Cost Me Thousands

Earlier this year, Forbes ranked Berkshire Hathaway Chairman Warren Buffett as the second-richest man in the world, with an estimated net worth of $37 billion. While his net worth had dropped by a cool $25 billion over the preceding 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, Goldman Sachs (NYSE: GS  ) , and even Harley-Davidson (NYSE: HOG  ) , all current Berkshire investments through either 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 part of 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 Motorola (NYSE: MOT  ) , MGM Mirage (NYSE: MGM  ) , DryShips (Nasdaq: DRYS  ) , Advanced Micro Devices (Nasdaq: AMD  ) and even Bank Of America (NYSE: BAC  ) -- all of which appeared 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 49 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 March 7, 2008. It has been updated.

Bruce Jackson finds taking out the trash satisfying. He is a beneficial owner of Berkshire Hathaway shares. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. Google is a Rule Breakers selection. Berkshire Hathaway and Coca-Cola are Inside Value recommendations. Coke is also an Income Investor pick. The Fool owns shares of Berkshire Hathaway, and its disclosure policy is enlightening.


Read/Post Comments (7) | Recommend This Article (2)

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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 October 16, 2009, at 5:34 PM, plange01 wrote:

    not listening to himself cost buffetts billions..

  • Report this Comment On October 16, 2009, at 11:09 PM, stefanic47 wrote:

    I listened to Buffett and I lost thousands. On CNBC, Squawk Box he said buy GE ($21), buy CLNE, invest in America and others. I did and failed to notice the next day he sold all the stocks he recommended people buy. A week later, I was out $9,000 and still haven't recouped. Worse it was in my 2 y/o Roth account. I can't make it up by selling and take the losses as a writeoff, can't reinvest lost money unless a miracle happens. My lesson, unless you are as rich as Mr. Buffett, ignore him.

  • Report this Comment On October 17, 2009, at 4:59 AM, devilzadvocate wrote:

    My take on Motorola is very different. I would consider it as a strong buy if it drops below 7.

    Today, only 1/3rd of Motorola's revenue is from it's Mobile Handset division. If you look at other divisions of Motorola (which is now 2/3rd).. it's doing great - Networking, Accessories (#1 or #2 in Bluetooth), Cable Box, etc..

    However, the share price is down based on sentiments on Mobile Devices earnings ALONE. My person belief is that the 2/3rd part of Motorola should by itslef represent share price $10. Hence, buy Motorola shares and just wait for the Mobile Devices to be killed or sold. The shares would go above $10 instantly. In case Mobile Devices is able to come up with a good product.. it would be icing on cake.

  • Report this Comment On October 18, 2009, at 7:02 PM, Macpherson02 wrote:

    Hilarious that people buy what Buffett buys, but don't understand that he is an investor, not a trader. Big distinction, and unless you understand it, you shouldn't blindly follow him.

  • Report this Comment On October 19, 2009, at 3:14 AM, BDOT071 wrote:

    stefanic47,

    I don't recall Buffett dumping individual stocks the day after he recommended them--that's illegal. I don't recall him ever owning GE stock. (He did, however, obtain preferred stock with a 10% coupon early this year.) He did have to come up with cash to make the GS and GE preferred deals, and some US stocks were sold to raise cash, but there was no net outflow of cash from US stocks.

    Regardless, I don't think Buffett would ever say to buy any stock and hold it for awhile and then look at the stock price a few months down the road and then decide whether it was a good investment on not based on what the share price is that day. Decades, not months, judge investments.

  • Report this Comment On October 19, 2009, at 3:17 AM, BDOT071 wrote:

    Was IBM a value stock back in 1980? It looked like it. Today, Google looks like it was a value stock even at 100x earnings back when it went public. Will it look like it in 20 years. That is the problem with technology--you can't accurately assess its future due to rapid change. This is why Buffett does not buy pure tech stocks.

  • Report this Comment On October 19, 2009, at 10:59 AM, TravelingMel wrote:

    I listened to Buffett and he made me thousands. Buffett boughy BYD at $8. I found out and bought at $21. Now it is $108 and change.

    I crack up about all of you Buffett whiners. It's simple. You want to be athletic, mirror and athletic person. You want to be rich mimic the guy that made Billions. Duh!

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