Mistake #1. Overpaying for growth.

Warren Buffett does not overpay for growth. In fact, he usually will not pay for growth at all. In most cases, Warren Buffett ignores projected growth. Unless the growth is in a business with a sustainable competitive advantage, Warren Buffett believes that growth has at best a neutral effect on the intrinsic value of the business.

If the growth is in a business with a sustainable competitive advantage, Warren Buffett still ignores the growth's effect on the intrinsic value of the business. In effect, the growth provides a little extra padding to Warren Buffett's all important margin of safety. Only in a few rare cases would Warren Buffett adjust his intrinsic value calculation upward by a small amount for growth. The reason for this is that even if the growth occurs in a valuable business, growth requires future changes to demand for the business's product, and this is inherently very uncertain.

The market at large, on the other hand, believes that revenue growth is one of greatest drivers of long term value. This can be seen by the enormous valuations the market puts on hot stocks, particularly in technology.

Mistake #2. Placing faith in earnings estimates or forward price to earnings ratios.

A related mistake, but still distinct, is placing faith in earnings estimates by Wall Street analysts. Forward price to earnings ratios are based on consensus or average estimates of future earnings by Wall Street analysts.

Both numbers are often unreliable. Numerous studies of earnings estimates have shown that they have little predictive power. Warren Buffett, relying on his long experience with markets, places no value on earnings estimates and does not use them to value businesses.

It is a mistake for investors to rely on either earnings estimates or forward price to earnings ratios to value businesses. It is impossible to accurately predict the earnings of a business even 1 or 2 years into the future, so earnings estimates are problematic when valuing a business.

Instead, Warren Buffett considers the long-term average earnings of a business to be more predictive of the future earnings of a business. One technique used by Warren Buffett and other value investors was first suggested by Benjamin Graham, the first value investor. The technique simply takes an average of the last 10 years of earnings by the business and uses that number as the most likely future earnings of a business.

Mistake #3. Not treating stocks as businesses.

This is perhaps the mistake that more investors make than any other. Warren Buffett believes that buying a stock means that you are buying a small part of that company's business, and he makes investment decisions based on the underlying business.

It sounds simple, but many investors and traders make investment decisions by treating stocks analytically more like numbers or charts and less like tiny pieces of businesses run by human beings. Technical analysis is just one school of investing along these lines. Warren Buffett would never buy a stock for any reason other than one rooted in the fundamentals of the underlying business, and the price the market places on that business.

It is easy to forget that, when owning one billionth of a company or even less, the long term success or failure of that investment depends on just two things: the price paid for the investment and the performance of the company in the long term.

Mistake #4. Making an investment decision by using short-term thinking.

Another mistake Warren Buffett would never make is entering into a long-term investment decision with short-term thinking. Warren Buffett, with few expectations, considers his investment decisions to be nearly permanent. Warren Buffett is not concerned with quarterly trends or the daily price fluctuations of the companies he holds.

Retail investors would do well to follow his example in this regard. Investment decisions should be well thought out and should be made with a time horizon of at least five years, and preferably decades. Quarterly trends and investment fads cannot be reliably predicted by most investors, so moving in and out of positions rapidly will only pile up transactional costs. Such an investment strategy is also likely to leave investors holding the bag when the latest trend collapses.