Warren Buffet 2005

Overall, Berkshire Hathaway has performed brilliantly in the last 40 years. Berkshire’s class A shares have been among the highest-priced shares on the New York Stock Exchange, in part because they have never had a stock split and never paid a dividend, retaining corporate earnings on its balance sheet in a manner that is impermissible for private investors and mutual funds. [1] The company averaged an annual growth in book value of 20. 3% to its shareholders for the last 40 years, while employing large amounts of capital, and minimal debt.

[1] Berkshire Hathaway stock price increased 845% in the last 40 years while in the same period, the Standard and Poor’s 500 Index rose only around 100%. Our gain in net worth during 2004 was $8. 3 billion, which increased the per-share book value of both our Class A and Class B stock by 10. 5%. Over the last 40 years (that is, since present management took over) book value has grown from $19 to $55,824, a rate of 21. 9% compounded annually. 6. What is the intrinsic value from Warren Buffet’s perspective and why is it accorded such importance? How is it estimated?

What are the alternatives to intrinsic value and why does Buffett reject them? Warren Buffet based his definition of intrinsic value on the Time Value of Money. He assessed intrinsic value as the present value of the future performance of a company during its life. This intrinsic value will however change in future with interest rate fluctuations and changes in estimated cash flows. Buffett however believes that intrinsic value, although fuzzy, is an integral part of evaluating a business. 7. Please critically assess Buffett’s investment philosophy, and prepare

to identify points where you agree or disagree with him and why. Buffett’s investment philosophy focuses on the following issues 1) Economic Reality of the business • Pros – Price is what you pay, value is what you get. • Cons – Although accounting reality might seem conservative and backward looking, Buffett’s time horizon for a value of the business is forever. 2) Portfolio Diversification • Pros – Investing in a few companies with a highly-sustainable competitive advantage is more profitable than investing in a dozen companies.

• Cons – Putting all the eggs in one basket can be risky for small-time investing. Also finding such exceptional investment opportunities is much easier said than done. 3) Risk and Return • Pros – Warren Buffett differed from conventional thinking by using only the rate of return on the long-term U. S. Treasury bond to discount cash flows. He ignored a risk-premium component of CAPM because he invested in only businesses that have predictable and stable earnings. Thus, There as no risk involved because risk comes from not knowing what you are doing.

• Cons – Academics compute with precision the beta of a stock by employing databases and statistical skills. 8. Should Berkshire Hathaway’s shareholders endorse the acquisition of PacifiCorp? Berkshire Hathaway is primarily in the insurance business. Pacificorp is a highly regulated utility company. You can’t expect to make large profits from a regulated utility. Acquisitions of this sort require regulatory approvals which are time-consuming. It does not seem to be a smart decision to acquire Pacificorp.