One basic error sets Omaha sage Warren Buffett apart from most investors - he never confuses price with value.
That was one of the many insights from Robert P Miles, best-selling author and Warren Buffett expert, on the CNBC Africa Power Lunch with Moneyweb on Monday.
Miles was speaking to Moneyweb host Alec Hogg, who has met Buffett and was among a small group of international journalists allowed to ask him questions at his Berkshire Hathaway annual general meeting in the United States earlier this year.
Buffett is known for shying away from the media and analysts.
The author, in South Africa to present at a value investor conference, told Hogg that he has been to a power lunch with Buffett twice and to Buffett's office a couple of times.
"He's very funny. He could be a stand-up comic," said Miles of Buffett's down-to-earth way of imparting advice to others.
Buffett has bought a Miles' book for his directors and has also mentioned one of Miles' books in his letter to shareholders, the Buffett-expert said, which is the equivalent of Oprah endorsing a book in the financial world.
Highlighting some of the lessons other investors can learn from the way Buffett sizes up companies when deciding whether to buy, Miles said: "Ninety-five percent of investors are investing on price and confuse price with value.
"Warren Buffett likes to play a game with himself. He likes to figure out what something is worth first, then he looks at the price."
If the price is a significant discount, then Buffett is a potential buyer. "Unfortunately most investors confuse price with value. Warren Buffett has made lots of mistakes - but not that mistake," said Miles.
Buffett is well-read, and likes to play bridge over the internet with his friends as well as surfing for information generally.
One of his best friends is bridge partner Bill Gates, yet Buffett has said he does not know Microsoft well enough to invest in it.
Miles clarified this position, saying that if Buffett "can't go out ten years and see where it will be", he can't discount to today.
Buffett says it is "important to know what you know and ignore all that you don't know". He "doesn't understand where computers will be in the next ten years", said Miles.
The investment sage from Omaha knows investors who have "made millions of dollars" owning just five or six different stocks "so it is not necessary for you to know about lots of different stocks outside your knowledge base", said Miles.
Of the many CEOs interviewed by Miles for a book on the Warren Buffett CEO, all were independently wealthy - to the tune of around US$100m each.
They all have free rein over their businesses, with Buffett attracting managers who "forget they've sold their businesses", as well as Buffett "forgetting" he has bought.
"His job is to recognise the Tiger Woods of the world, if golf were a business, and the last thing he'd want to do is tell Tiger how to play golf," said Miles.
Also of importance to Buffett when he buys a business are: earnings - they currently need to be in the region of at least a net annual US$75m; a high return on equity; little to no debt; that they are throwing off cash, not requiring it; are simple businesses; and he needs to know the price.
Buffett, Hogg discovered earlier this year, would love to make a big deal in South Africa.
Source: Moneyweb
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