Mistakes Other Investors Made So You Don't Have To

By Whitney Tilson and John Heins
Kiplinger's Personal Finance
Sunday, September 21, 2008; Page F03

Warren E. Buffett frequently reminds people: "It's better to learn from other people's mistakes as much as possible." In that spirit, here are five traps that can snare even conscientious investors:

1. The game has changed. There's a fine line between opportunity and trouble when a once-strong business goes into decline, as investors in newspapers have learned in recent years.

2. High and rising debt. Value investors are naturally drawn to companies in trouble -- that's what makes stocks cheap if the difficulties prove to be temporary. But too much debt can ruin even the best-planned turnaround.

3. Consumer fads. When investors extrapolate far into the future what are highly likely to be impossible-to-maintain growth levels, trouble follows. Crocs is a prime recent example.

4. Serial acquirers or mega-acquisitions. Given the research showing that a significant majority of acquisitions destroy value for the buyers, it's remarkable how frequently investors get excited about roll-up stories or big acquisitions.
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5. Aggressive accounting. The gray areas in generally accepted accounting principles in the United States give executives considerable leeway in how aggressively or conservatively they represent company operations. When a company's accounting treatment creates more questions than answers, something is usually wrong.

5. Aggressive accounting. The gray areas in generally accepted accounting principles in the United States give executives considerable leeway in how aggressively or conservatively they represent company operations. When a company's accounting treatment creates more questions than answers, something is usually wrong.