How to avoid the big investing mistake that snared Warren Buffett

We’re only human…. That’s the problem.

Even seasoned investors can let emotions mess up a well thought-out business investment by concentrating on a sticking point when the total opportunity shouts “It’s a buy!”

Billionaire Warren Buffett had the opportunity to buy into Walmart in the 1980s when the stock was still under US$5 (now US$77.30). The company looked attractive, it was growing and was a low-cost operator. What was wrong?

The share price had gone up one-eighth of a dollar, about 12.5 cents, past what he thought was the price to buy at. He second guessed his analysis on why it was a good buy in the first place. The little bit extra he’d have to pay stuck in his mind.

In the end, he didn’t buy then. Looking back, Buffett estimated that lapse in intelligent investing cost his company, Berkshire Hathaway, Inc. (NYSE: BRK.A, BRK.B), about $10 billion over time.

One of the best ways to avoid this mistake is to buy “growth at a reasonable price” when stock picking.  We don’t want to pay just any price. Yet if a company looks like it can reliably grow for many years, then the extra you may pay now can come back to you many times over in future returns.

Below are two stocks that could offer substantial growth for the price levels they’re at now. They may come down a bit in price if the market cools, but their growth stories could keep earnings levels up for a number of years.

REA Group Limited (ASX: REA) has a tight hold on the online property search market with its number one website and is expanding internationally. It regularly increases earnings around 30% annually and has a 33 PE. If you can see the growth reliably continuing, then a high PE shouldn’t scare you off automatically.

Domino’s Pizza Enterprises Ltd. (ASX: DMP) is at a 44 PE, which might seem crazy for a restaurant chain. However, it is the largest Domino’s Pizza franchisee company in the world and it’s going to double its store network in Japan in the next five years. That’s while it is still growing in Australia and several European countries as well.

These are not the only growth plays that could reap investors remarkable returns over the coming years. Some companies are using disruptive technologies to create new ways to do business and change the industry playing field.

The Motley Fool has just released a special video report on our analysts’ #1 ASX tech pick -– all about the one Australian company poised to win big from the ‘cloud computing’ trend. (Hint: The shares are already up over 100%!) Click here to claim your FREE copy.


Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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