Warren Buffett 2005

The possible explanations in the change in stock price for Berkshire would be for a couple of reasons. One of them is that investors invest based on the behavioral finance theory which implies that their investments are driven by psychological factors. These factors would be that believing that Mr. Buffet is the guru of investment, therefore he is right and it must be a very good investment.

Moreover looking at the financial statements of march 2005 we see that the book value of PacifiCorp = 3377.1 Billions/312.12 millions shares =$10.82 per share. However, the increase of 2.17 billion dollars at the day of the announcements of Berkshire implies that that true value of PacifiCorp should be higher if we divide the 2.17 billions /312.12 millions shares we have that the PacifiCorp share should have a $ 6.95 dollar value higher.

2 Alliant E. Corp Low price P/E =23.50/1.42=16.55 High price P/E =28.80/1.42=20.28 Cinergy Corp Low price P/E =34.90/1.42 =16.23 High price P/E =42.60/2.15=19.81 NSTAR Low price P/E =22.70/1,79=12.75 Hight price P/E =27.20/1.78 =15.28 SCANA Corp Low price P/E =32.80/2.34=14.02 High price P/E =39.70/2.34 =16.93

WEC Low price P/E =29.50/2.62=11.26 High price P/E =34.60/2.62 =13.21 Industry average low price P/E=14.20 Industry average high price P/E =17.11 PacificCorp EPS =0.81 Stock price of PacifiCorp= EPS x (P/E industry) Range of PacifiCorp posible values Low price >0.81x14.20= $11.50 High price >0.81x17.11=$13.86 Possible value for PacifiCorp using EBITDA Total value Company =market value + net debt Market multiple =total value company /EBITDA EBITDA Alliant E. Corp= 7.45x NSTAR 7.53x SCANA Corp 9.25x WEC 8.47x Average =8.18x Total value of company = Market multiple X EBITDA PacifiCorp’s EBITDA=1093.30 Market multiple =8.1 Value of PacifiCorp = 8.18x1093.30 =8,943.19 million dollars

3) Performance of Berkshire since 1977 to 2005 PV=102 FV=85500 N=28 I=34%

S & P performance since 1977 to 2005

PV =96 FV=1192 N=28 I=9.42

Berkshire has outperformed S & P by 24.58%

4) Buffet’s approach of investments is based on the fundamental analysis of the company itself. It is based on simplicity and consistency of its operation history, attractiveness of long term prospects, quality of management and firm’s capacity to create value. The big four, Coca-Cola, American Express, Gillette and Wells Fargo have all these characteristics. For instance Coca- Cola has been in business since 1919(Reuters). It is a multinational with the biggest market share world wide.

Coca- Cola’s finished beverage products bearing its trademarks are sold in more than 200 countries (reuters.com). Buffet looks at what the consumers are looking for and what the general economic trend is at that time and what it will be over time. He researches a company as a whole and looks at what people want and what people are transitioning into in the future. For instance most of his investments in the big four were done in 1992. During these 13 years we can see how well the big four have performed compare with the S& P 500

S & P 500 At January 1992 adjusted to dividends and splits =408.78 At December 2005 adjusted to dividends and splits =1248.29 n=13 Return =8.96% American Express. Price at January 1992 adjusted to dividends and splits =4.02 Price at December 2005 adjusted to dividends and splits =49.68 N= 13 Return =21.34%

Wells Fargo Price at January 1992 adjusted to dividends and splits =2.69 Price at December 2005 adjusted to dividends and splits =28.25 N=13 Return =19.82%

Coca-Cola Price at January 1992 adjusted to dividends and split =14.5 Price at December 2005 adjusted to dividends and splits 37.50 N=13 Return =7.50%

5) The definition of intrinsic value according to Mr. Buffet is the present value of all future expected cash flows or performance. The measurements of intrinsic value are focused on the ability of the company to earn a return in excess of the cost of capital including the opportunity cost. Intrinsic value is not based only on the net profit.

Alternatives to intrinsic value.

1) Accounting profit. Mr. Buffet believes that the true value of a company is based on its intrinsic value not on its accounting profit. Financial statements prepared by accountants are conformed around rules that do not adequately represent the economic reality of business.

2) Technical analysis. Mr. Buffet rejects the technical analysis that attempts to predict the stock prices based on momentum of trends. He believes in long term investment.

3) Efficient market hypothesis. Mr. Buffet rejects the efficient market hypothesis theory (EHM). He believes that there are opportunities out there. Investing should be based on information analysis of the company.

6) Mr. Buffet does not believe in diversification. We believe that diversification helps in times like the one that the market is having right know. For instance stock value of American Express in the last year has ranged from $53 a year ago to $15 dollars this week resulting in a loss of 70 % and also the market value of Wells Fargo is down by 65% (yahoo finance). If you compare those two companies with the S & P during the last year it is only down by 40%.

This also means that market risk is still there. We believe that Mr. Buffet has not had a situation in the economy such as the one that the country is having now. Even he, the guru of investments is losing money, so we know that the risk is there.

We agree on his philosophy on investing behavior. It should not be driven by emotion or hunch but should be a well thought out plan that came about by information, analysis and self-discipline. If you go by hunch or emotion then anyone can work you up and sell you the worst deal of your life, but make you think it is the best one you will ever get.

We agree with his belief on the alignment of owners and investors. It is always a good thing when the owner has more than 50% of his net worth invested in the company because the goal would definitely be increasing shareholder wealth.

7) The Berkshire Hathaway shareholders should endorse the acquisition of PacifiCorp. It took a while for Mr. Buffet to finally invest their cash equivalents because he was looking for an “elephant" which is a company that makes significant gains. Factors that make it a good acquisition include the fact that PacifiCorp is a low-cost energy producer but has the biggest market share among the energy companies which is 1.6 million customers divided among 6 states plus the intrinsic value of the company is much higher than the market value of PacifiCorp.