Win Buffett's Billions

It's official. Warren Buffett, the billionaire investor who has served his Berkshire Hathaway (NYSE: BRKb  ) shareowners so well over the past few decades, is starting to disburse his fortune.

Valued at well over $40 billion, the wealth he has amassed is enough to send a $100 check to everyone in the country with another $10 billion stocked away for a rainy day.

Naturally, Buffett isn't collecting addresses. His charitable bent wouldn't allow for that to happen. Instead, the 75-year-old Buffett is earmarking the lion's share of his portfolio to be gradually disbursed to the Bill & Melinda Gates Foundation.

Now, if you're like me, you're envious of Buffett's ability to make a positive difference in the world. His fortune is truly going to help people. But philanthropy isn't outside of your means (indeed, with the help of many Fools, our Foolanthropy campaign raises money for five worthy causes, nominated by our readers, every year). Buffett made his fortune in the stock market, just as you can. So if you want to be able to give away billions sometime down the line, get started earning them first.

One billion smackers at a time
If you want to grace the cover of Time as its Person of the Year circa 2036 in honor of your philanthropic ways, you'll need to take the art of investing as seriously as Buffett has over the years.

So, let's size up your stocks. Whether your portfolio is coasting along or you're just starting out with empty pockets, it's never too late to make a mint in the market. All you need is superior returns and a little bit of time.

To earn those superior returns, perfect your investing philosophy. One way to get started doing is to go back and read all of Buffett's annual letters to his Berkshire Hathaway shareholders (available for free at the company's website). There's always a gem or two of investing wisdom that can help all of us be better investors.

I'll get you going by taking you all the way back to 1991, when Buffett elaborated on the concept of "look-through earnings":

We also believe that investors can benefit by focusing on their own look-through earnings. To calculate these, they should determine the underlying earnings attributable to the shares they hold in their portfolio and total these. The goal of each investor should be to create a portfolio (in effect, a "company") that will deliver him or her the highest possible look-through earnings a decade or so from now. An approach of this kind will force the investor to think about long-term business prospects rather than short-term stock market prospects, a perspective likely to improve results.

It's true, of course, that, in the long run, the scoreboard for investment decisions is market price. But prices will be determined by future earnings. In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard.

It's a pretty simple concept to grasp, ultimately leading to the conclusion that a company should be valued on the basis of what it will earn in the future.

Straying from the Buffett buffet
At the risk of offending the value camp, Buffett included, I'm going to argue that nailing look-through earnings is more art than science. Value investors love to apply predictable growth targets to their long-term multiples, but reality is far more lumpy.

Let's take Coca-Cola (NYSE: KO  ) , for instance. It's a Buffett favorite. If you were to view the company through "look-through" goggles a decade ago, you would have figured that although the company was trading at a rich multiple, robust global growth and improving margins would serve the pop star's long-term investors well. Not quite. The stock is actually trading lower today than it was 10 years ago.

That's why this value investor technique can work even better when you're looking at growth stocks -- as long as you sprinkle in a dash of visionary acumen. After all, aren't great growth stocks the poster children for mispricing, since Wall Street can't grasp their earning power?

When Google (Nasdaq: GOOG  ) went public in 2004, for example, it was looking to price itself at $135 a stub, or roughly 300 times trailing earnings. The company ultimately had to settle for an $85 starting point, but the joke has been on the skeptics. Online advertising and Google's market share proved to be far more potent than even some bulls were speculating. Blowing past profit targets has only led to analysts raising the bar higher and higher.

Google's shares have grown nearly fivefold and are trading at 43 times this year's bottom line estimates and 32 times next year's profit projections. Paying $85 a share for Google may have seemed risky at the time, but you would have owned a fast-growing search stud at less than seven times forward earnings today.

One of the biggest winners for the aggressive Motley Fool Rule Breakers newsletter service is a company by the name of Intuitive Surgical (Nasdaq: ISRG  ) . The stock has more than doubled since David Gardner selected the maker of robotic surgical arms that has revolutionized the operating room. Looking back, it may not have seemed so special. The company lost money in 2002 and lost a little less in 2003. It wasn't until 2004 that Intuitive Surgical posted a profit.

Intuitive trounced Wall Street's numbers during every single period in 2004. Had analysts finally caught up to the company's earnings power in 2005? No way.

Q1 2005

Q2 2005

Q3 2005

Q4 2005

Earnings Estimate

$0.19

$0.21

$0.29

$0.49

Actual Earnings

$0.25

$0.40

$0.55

$1.31

*Earnings data from Thomson.

Add it all up, and the company wound up earning $2.51 per share. That's a far cry off the quarter-by-quarter $1.18-a share projections. Forget "look-through" earnings. Get into "look ahead" earnings instead.

Loose change adds up
There are plenty of reasons to love Warren Buffett, even before his charitable pursuits won him the warm fuzzies from the media. He is arguably the greatest investor of our time. His performance numbers have earned him that much.

I'm just not entirely convinced that the next "greatest investor of our time" will stick to old economy stocks with solid fundamentals the way that Buffett has in amassing his billions. That honor will likely go to the visionary who can embrace the secret ingredient of nailing growth stocks that are running circles around the market's best number crunchers.

Take a look at Pixar before it was acquired by Disney (NYSE: DIS  ) . Sneak a peek at Apple Computer (Nasdaq: AAPL  ) and its streak of beating the Street for 13 consecutive quarters, or at the more obscure Steiner Leisure (Nasdaq: STNR  ) , which has bested profit targets in all but one quarterly installment over the past four years.

Need a helping hand finding these fast growers? Consider a subscription to the Motley Fool Rule Breakers premium research service. It's where many Fools were first introduced to recommendations like Steiner Leisure and Intuitive Surgical. And if your name is Warren Buffett, or anything else, actually, take advantage of a free 30-day guest pass to kick the tires to see if it's right for you.

Envious of Buffett's billions? Do yourself a favor and roll your own.

The Foolanthropy 2006 campaign will be sponsored by Hilton Family Hotels.

Longtime Fool contributor Rick Munarriz has been writing the "Early Adopter Roundup" column since the Rule Breakers newsletter's inception in the fall of 2004. He does own shares in Disney, a Stock Advisor pick. Coca-Cola is an Inside Value recommendation. TheFool has a disclosure policy.


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