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The Crucial Advice From Buffett You're Probably Ignoring

Andy Obermueller

The latest rankings of the world's richest people show that telecom magnate Carlos Slim of Mexico is again on the top of the heap, followed by Microsoft founder Bill Gates.

Both of these men amassed dizzying fortunes primarily with one investment: Gates with Microsoft (MSFT) and Slim with America Movil (AMX), one of the largest telecom companies in the world.

Fourth on the list is Warren Buffett. The Oracle of Omaha also made his fortune with one company, Berkshire Hathaway (BRK-B), but there's a twist. While Microsoft is focused on software and America Movil on cellphones, Berkshire is a holding company. Its business is to own other businesses.

It is Buffett's uncanny ability to pick winning businesses that has enabled the modest man from Omaha to pile up nearly $55 billion.

But is it really all that uncanny?

I don't think so.

If you go to the bookstore, you'll find a whole shelf of books on Buffett in the investing section. They will be chock-full of his witty sayings. His earthy common sense resonates with everyone. No matter the story on the financial channels, Warren Buffett is the one we all gravitate to. He always makes sense, and he always makes money.

But no one listens to a word he says. Not really. They process his words. They laugh at his jokes, but people just do not hear what Buffett is saying.

I've followed Buffett for 30 years. I've read all of his shareholder letters, gone to shareholder meetings to hear him talk and read most of the books about him. They all capture Buffett the man. A few restate his investment philosophy. But no one has ever -- ever -- mirrored his method.

This, frankly, is pretty curious.

I'm going to tell you a theory I have about Buffett. It might seem a little controversial. It may seem contradictory to the jovial image most of us harbor. I think Buffett woke up one day and decided to do a little experiment. He decided to test if people really were paying attention. And he started to tell them everything he knew about business and investing. He wrote, he taught, he spoke. He appeared on television and gave interviews.

As the decades passed, Buffett conclusively proved one thing, and one thing only. It was this: People simply do not listen. No matter how credible the source or enviable his track record, people always assume they know better.

They don't. Buffett told them all he knew. The shelf full of books is there because he wanted it to be. Everything the man knows is laid out for you to benefit from. But you'll likely ignore it. Buffett has proved this.

The entire financial world is focused on the income statement. We go nuts for earnings season. Alcoa (AA) kicks it off every quarter. Then the big banks make their announcements, all in a row. Hundreds of major companies issue their financials. Wall Street compares them with their estimates. Trading volumes soar. Prices swing.

This is madness. The income statement is functionally meaningless. Wall Street's consensus forecast for any company's earnings is also meaningless. Buffett knows this. He's been saying this for years.

Warren Buffett DOES NOT buy a company for what it has done. He buys companies for what they will do. And that is not something you can find on the income statement. The income statement is in the past tense.

The balance sheet, however, is about the future. The income statement is a video of a game already played. The balance sheet is a snapshot of a player running toward the goal line with the ball tucked under his arm.

If you want to be a better investor, forget the bottom line of the income statements. Read every line of the balance sheet instead. I've been talking about this a lot with my Game-Changing Stocks readers lately. And later this week, I'll show StreetAuthority readers a little more about reading balance sheets. It's important, it's interesting -- and it can make you a better investor than most.

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