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.

Is Warren Buffett AIG-Proof?

Who needs six degrees of Kevin Bacon when you can play six degrees of AIG (NYSE: AIG) instead?

Since the witch hunt continues for anyone linked to the maligned insurer's money, isn't it really just a matter of time before public scrutiny begins to rain down on the companies that benefited the most from the $170 billion that AIG has received?

Here is where even Warren Buffett himself risks becoming an accidental tourist. Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) hands are completely clean, but his company's investment in Goldman Sachs (NYSE: GS) late last year places Buffett just two degrees of separation from the AIG fiasco.

AIG didn't just receive $170 billion in bailout money. The government lodged explosive dye packs into the stash, and now it's starting to blow up in the pockets of everyone who's holding it.

If retention bonus recipients are being vilified for being handed $165 million of the bailout funds in contractual back pats, how much longer will it be before the hounds start sniffing around Goldman Sachs? After all, AIG handed over nearly $13 billion of the now tainted bailout proceeds to Goldman Sachs to settle a score.

Yes, Goldman Sachs is loaded. It probably didn't need the $10 billion in TARP proceeds that it was talked into swallowing down back in October. It also probably didn't need the $5 billion it scored a month earlier in selling high-yielding preferred stock to Berkshire Hathaway a month earlier.

In fact, yesterday's New York Times is reporting that Goldman Sachs is now considering paying back its $10 billion in TARP funds within the next month. After watching companies like Citigroup (NYSE: C) and now JPMorgan Chase (NYSE: JPM) get crucified over corporate jet orders, and nearly every TARP recipient being scolded for executive compensation practices, one can't blame Goldman Sachs for getting out of dodge while the stagecoaches are still running.

However, Goldman's clearly not going to return the nearly $13 billion it got from AIG. It's money that rightfully belongs to Goldman Sachs, though one has to wonder how much of that it would have seen if the government had let AIG collapse under its own weight last year before deeming it too big to fail.

If no one sees that that is where the public anger is going to next, I'll draw you a map.

So, let's go back to Buffett. Berkshire Hathaway's investment in Goldman Sachs was practically bulletproof. Collecting 10% on "perpetual" preferred stock seems like a risk-free bet, as long as Goldman Sachs is still in business. However, it also scored warrants in the deal to snap up $5 billion of Goldman Sachs at $115 over the next few years. Goldman Sachs has to not only survive -- but thrive -- for that to be valuable.

So, Buffett is positioned to likely laugh all the way to the bank on this one, but Berkshire Hathaway will clearly have more money to lug to said bank if Goldman Sachs can keep the bloodthirsty mob away.

They're inching closer, though, so watch out.

Source from:http://www.fool.com/investing/general/2009/03/24/is-warren-buffett-aig-proof.aspx