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Not listening to Buffett cost me thousands

Warren Buffett has an estimated net worth of around US$50 billion. He is almost universally accepted as one of the world’s greatest share market investors. When he talks, it pays to listen, says The Motley Fool.

Warren Buffett 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 sidekick Charlie Munger once said, “All intelligent investing is value investing.”

Google as a value share

Buffett focuses on companies with favourable long-term economics and strong competitive advantages — companies such as Coca-Cola, American Express, Goldman Sachs, General Electric, and Nike, all current Berkshire Hathaway investments.

In Australia, Buffett might look at companies like Woolworths (ASX: WOW), QBE Insurance (ASX: QBE), Computershare (ASX: CPU), CSL (ASX: CSL), ASX (ASX: ASX) and Cochlear (ASX: COH), to name a few.

One Wall Street analyst called Coca-Cola “very expensive” around the time Buffett started buying it. It wasn’t a typical value share. 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 shares 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 share at its IPO in August 2004, despite selling, at the time, for more than 100 times earnings.

A value share 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 shares,” 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 shares. 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 shares” — cheap shares with mediocre (or worse) businesses.

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 shares.”

Through a combination of expensive errors, experience, and a commitment to continued investing education, I’ve slowly come to realise 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’re looking for such share ideas today, you’re in the right place. In the coming weeks, we’ll be covering such companies, and much more. Stay tuned.

In the meantime, I wish you happy, trash-free investing.

Of the companies mentioned above, Bruce Jackson has an interest in Berkshire Hathaway, Woolworths, and belatedly, Google. The Motley Fool has a clean disclosure policy.

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