Cramer: Even Buffett Can Blow It

 | May 08, 2017 | 2:24 PM EDT
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It happened. It finally happened. A money manager came on air and admitted he made a mistake, that he had an obvious win on his hands and he punted, he didn't take advantage of it. That's the good news.

The contrary news? The money manager was Warren Buffett and maybe the takeaway is it takes the world's greatest money manager to admit a mistake. Everyone else may be too insecure to do so.

Like you, if you are interested in the stock market, I was rapt at pretty much everything Buffett talked about this glorious weekend of business, when this octogenarian, still going so strong, talked about what he's thinking and what he's looking at, what he's done right and what he's done wrong.

To be sure, the man has done so much right that there's not really much to say. He and his team, including the incredibly youthful 93-year-old Charlie Munger, Warren's No. 2, have analyzed stocks and found values, particularly the companies that he buys entirely, better than anyone in existence.

It's worth it, before I go over his self-admitted gaffes, to remind you that this is a man who believes in progress and believes in America and believes the future will be brighter than the past. He likes businesses with big moats, not a lot of competition and that are best of breed that he can buy for less than best-of-breed prices. He's always on the prowl for bargains, but he knows there's no called third strikes in the business world, so he can take his time and get it right because the penalties for getting it wrong are very high. He values hard work and smart work and knows how to find those who do it.

Most of all, he's joyful about the process. He is genuinely curious and, while skeptical, he is not cynical, and don't let his folksiness get to you, he doesn't suffer fools gladly and is willing to make harsh judgments if a CEO's got it wrong. Witness his upbraiding of John Stumpf, the former CEO of Wells Fargo (WFC) , for not reacting quickly enough to wrongdoing about cross-selling and the incentives that drove the miscreants.

But it's the amazing story he told about Google (GOOGL) that truly had me on the edge of my seat. Geico, his amazingly run auto insurance business, early on realized that you wanted to advertise on Google in order to get people to buy at what is the obvious point when they are looking to purchase insurance. Remember, Geico can run all the ads it wants with the gekko, with the cute vignettes, whatever, but most of those ads do not reach the most important targeted audience, those looking for insurance right then and there. They are expensive branding ads that obviously work, or they wouldn't run them, and could influence you at a certain point.

But it was Google that he was enamored of and the fabulous return on investment Geico was getting from the ads. Here's where this man's confidence helps us out so much. He admitted that he recognized that Google's cost of taking that ad was virtually nil, that it was about 100% profit. He even met with the founders of Google.

Yet he didn't pull the trigger. I am not quite sure when he realized what a buy Google was, but let's just compare that with IBM (IBM) , which he bought in the first quarter of 2011. If we look back at IBM, it traded at roughly $160 during the period when he started buying. It's now about seven bucks below that but he did get plenty of dividend income in the interim.

But more important, Google, which subsequently became Alphabet, was at about $300. Now it is $950. It's most likely that he learned of Geico's reliance on Google long before that. However, he also said it wasn't clear which would be the clear winner in the space when he started advertising, mentioning to CNBC's Becky Quick that he wondered whether Bing could be a winner, something that tells you he could have bought Google even lower than the price I have mentioned.

What can we learn from this mistake? First we have to recognize just how hard this stock business is. Few people would have had the insight that Buffett had about Google, and yet he didn't buy it. It is interesting by the way that he bought IBM's stock, apparently without much firsthand knowledge of the changes, and we know he's impatient with whatever turn might be happening. In fact, when asked about Watson, emblematic of the new IBM, he pretty much damned it with faint praise, wondering aloud how commercial it really is and how it may be growing fast but off a very small base.

So when you put his IBM pick alongside his failure to pull the trigger on Google, you have to conclude that if even Buffett can't get these stocks right, but you share his view of the world, then a low-cost index fund is certainly the bedrock investment you must have. Remember, the S&P kicks out the worst companies, benefits from any takeovers, and can then add the best companies that aren't in the 500. So it isn't like you are getting something mindless. Buffett said in his annual report that he preferred the Vanguard low-cost fund and he praised the fund's founder, Jack Bogle, as the man who made billions for people.

How about takeaway No. 2: Once you have your bedrock investment and you keep adding to it every year, if you have some spare cash why not try to put it to work in some stocks you can find yourself? The best example? How Buffett found Apple (AAPL) : He simply saw so many kids at Dairy Queen, which he owns, loving their Apple and recognized it not as a technology company that may not be growing as fast as many other tech companies, but as a unique consumer-product company that sells for far less than all the others out there, including many he knows so well.

Remember, this is a man who knows the stocks of Coca-Cola (KO) and Kraft Heinz (KHC) and Procter & Gamble (PG) , which he jettisoned last year. He recognized that Apple's stock sold at a fraction of the price of those companies yet it has a price point that few seem to blanch at and a customer loyalty second to none. These are precisely the attributes that CEO Tim Cook stressed to me when I spoke to him in Cupertino last week.

When you put it like that, against similar companies with limited top-line growth but good bottom-line and dividend growth, it's obvious that even up here Apple is a very cheap stock.

What else can we learn? I think that if we keep our eyes open we can always find good companies where we can ready ourselves to buy their stocks at the right time. My daughter's always on Instagram, my wife checks her Facebook feed every night. They are not oddities, they are part of what may actually be a growing majority. So why not think that it, like Google, has very low cost of goods sold and yet is ideal to advertise against. I could argue that Google itself, now that it is expanding well beyond just search advertising, into YouTube video, data centers and self-driving cars, may be a bargain given the misperception that it hasn't grown beyond search. 

Again, I am not saying you should build a portfolio of what you like and what you think is best. Remember, Coca-Cola hasn't done as well as PepsiCo (PEP) . American Express (AXP) isn't nearly as good a company as MasterCard (MA) or Visa (V) , to name two other Buffett holdings. It's just a real hard business. (Wells Fargo, Alphabet, Apple and PepsiCo are part of TheStreet's Action Alerts PLUS portfolio.) 

If you want to augment that index fund with a few picks of your own, I think that's a totally responsible and, frankly, thrilling way to try your hand at growing wealth beyond the ordinary, even if the ordinary has done pretty darned well all by itself. 

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