It has performed very well. Berkshire Hathaway has consistently outperformed the market since its inception in 1965. In 1977, the firm’s year end closing share price was $107; on May 24, 2005 the closing price on its Class A shares reached $85,500. Berkshire has had an annual increase of wealth of 24% since 1965, which is more than double the 10. 5% of the average increase for other large stocks. It started out with a decline due to inflation, technological change, and intensifying competition from foreign competitors, but has recuperated well after closing the textile side of their business.
Berkshire Hathaway had recently been performing below S&P 500 Index according to Exhibit 1, from April 2005 to May 2005. Scottish Power had consistently outperformed the S&P 500 Index from March to May 2005. This probably was one aspect that attracted Berkshire to purchase PacifiCorp. We believe that it was a good investment. In 2002 they owned 9. 9% of the voting interest and 83. 7% of the economic interest in the equity of MidAmerican. This allows them to have a major stake in the company without violating utility laws, which has proven to be successful for them.
According to Exhibit 6, MidAmerican Holdings had a net earnings of 170 million in 2004, but compared to 2003 net earnings of 416 million, MidAmerican had a net loss from 2003-2004. Acquiring PacifiCorp would supply much needed new, more profitable investments to raise their net income in 2005. 5. What is your assessment of Berkshire’s investments in Buffett’s Big Four: American Express, Coca-Cola, Gillette, and Wells Fargo? They invested in well established and successful firms.
They put a lot of money up front for these investments, but since have made substantial gains for their investment. The total cost to Berkshires investment in the Big 4 was $3. 832 Billion, but the market value of their investment was $24. 681 Billion. This means that Berkshire’s current gain on their investment in the big 4 is $20. 849 Billion. Their gain is 5. 44 times their investment I would have to say that these were very well thought out and successful investments. 6. From Warren Buffett’s perspective, what is the intrinsic value?
Why is it accorded such importance? How is it estimated? What are the alternatives to intrinsic value? Why does Buffett reject them? a. The discounted value of the cash that can be taken out of a business during its remaining life. Intrinsic value is per-share progress. Buffett assessed intrinsic value as the present value of future expected performance. b. Because if focuses on ability to earn returns in excess of the cost of capital, not accounting profit. Only logical way to evaluate the relative attractiveness. c.
The gain in intrinsic value could be modeled as the value added by a business above and beyond the charge for the use of capital in that business. d. Accounting profit, performance of Berkshire by its size, consolidated reported earnings e. Accounting reality was conservative, backward looking, and governed by GAAP (measures in terms of net profit). Investment decisions should be based on economic reality. This includes intangible assets such as patents, trademarks, special managerial expertise, reputation, etc. 7. Critically assess Buffett’s investment philosophy.
Be prepared to identify points where you agree and disagree with him. Warren Buffett has a very simple method of investment strategy compared to other investors. Buffett’s philosophy is defined in 8 elements. We will discuss whether we agree or disagree with each one individually. We agree with Buffett’s first element of analyzing economic reality of investments. Most investors focus on financial statements and net profit, but don’t take into consideration intangible assets such as management experience and patents.
We also agree with Buffett’s second element of lost opportunity cost comparison. By analyzing expected returns of an investment compared to the rate of return of using that same investment money in another investment, Buffett takes a simple idea that everyone uses in almost every decision, and applies it to a much more complex investment strategy. Everyone weigh’s the alternative when making a decision, whether that decision is a choice of a coffee or a coke or something more complex like a college education versus not getting an education.