International Business Machines Corp. (IBM): Four Buffett Myths Debunked

Thanks to the 14% rally in shares of Berkshire Hathaway Inc. (NYSE:BRK.A) so far this year, CEO Warren Buffett has once again overtaken Spanish retail titan Amancio Ortega as the world’s third-richest person. All told, the Oracle of Omaha now has an eye-popping net worth of approximately $54.6 billion.

It’s only natural, then, for people to explore exactly how Buffett amassed his fortune in their efforts to even partially replicate his success. This widespread speculation, however, has resulted in oft-repeated bits of misinformation. As a result, many retail investors fall victim to persistent myths regarding Buffett’s investing style.

Here are five such misconceptions, and why they’re wrong.

Myth No. 1: Buffett hates share buybacks
In reality, Buffett only loathes poorly executed buybacks, and made as much clear in 2011 when Berkshire announced it would be willing to repurchase its shares at a price of up to 110% of book value. Of course, Buffett fans were understandably confused when that happened, considering it was the first time Buffett had declared his willingness to repurchase Berkshire’s shares since he took the helm in 1965.

Later in 2012, folks were even more confused when Buffett repurchased $1.2 billion of Berkhire’s Class A shares at around 116% of book value, simultaneously raising his limit to 1.2 times. So did this move signal a deterioration of Buffett’s long-standing strict criteria for identifying superior investments? Hardly.

In fact, Buffett circumvented the move when he devoted an entire page of Berkshire’s 2011 shareholder letter to explaining his stance on stock repurchases, with the following paragraph summing things up nicely:

Charlie and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated.

Myth No. 2: Buffett only buys cheap stocks
I find this widespread assumption especially puzzling knowing Buffett himself is often quoted as saying, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

This is exactly how Buffett built his empire and, incidentally, it also helps to reaffirm the notion held by Fool.com co-founder David Gardner that winning businesses tend to keep on winning. That’s not to say Buffett is willing to pay any price for great businesses, but if there’s anyone who knows how to weigh risk versus reward, rest assured it’s him. In the end, the overall quality of the business consistently trumps its price — and rightfully so.