Solution To Case Stury Warren Buffett

1354 words - 6 pages

Assessment of the eight major elements of Buffet's investment philosophy:

1 Economic reality, not accounting reality.


One tends to agree with Buffett on this philosophy.
Accounting is a product of many estimates and judgments. It is essentially a rear-view mirror, looking back at what has happened. To add to the problem the view changes with each new accounting period.
In contrast the economic reality is the view through the windshield at what lies ahead. It consists of intellectual property, creativity, know-how and the network of production and distribution systems. The brands and trademarks of a business are the symbols of the economic reality – symbols that ...view middle of the document...

The rate of return received from an investment is the profit divided by the cost of the investment. Positive NPV investments will have rates of return higher than the opportunity cost.

4. Measure performance by gain in intrinsic value, not accounting profit.


Here the gain in intrinsic value being referred to is similar to the ‘EVA’ , ‘economic profit’ or ‘market value added,’ measures which are used by financial analysts to assess financial performance. These measures focus on the ability to earn returns in excess of the cost of capital. The difference between a company's return and its cost of raising capital is called "EVA" (Economic Value Added). Unlike traditional accounting measures, (EPS and ROI) EVA focuses on economic profit rather than accounting profit and hence calculates shareholder value creation/destruction over the relevant period of time. In other words when we measure performance by gain in intrinsic value we are estimating the amount by which earnings exceed or fall short of the rate of return shareholders and lenders could get by investing in other securities of comparable risk. Thus it builds on the concept of opportunity cost.

5. Risk and discount rates.

Here one would disagree with Buffett.
Risk and return is one of the basic principles in finance. Risk and return are directly related. The greater the risk that an investment may lose money, the greater its potential for providing a substantial return. By the same token, the smaller the risk an investment poses, the smaller the potential return it will provide. Thus there are different classes of investment depending on their risks.
Buffett may argue that he avoids risk by focusing on companies with predictable and stable earnings and being a large investor he can sit on the boards of directors where he obtains a candid, inside view of the company and could intervene in decisions of management if necessary but this option is not available to all investors especially small ones. Therefore it is not prudent to discount all future cash flows at the risk free rate.

6. Diversification.

One tends to agree with Buffett on this philosophy.

Diversification is a basic principle in investing the idea being that since you cannot possibly know beforehand which stocks will perform better or worse than the average, you cannot afford to put all of your money into one company, or even in companies within a single industry. One resorts to diversification to spread the risk -- and opportunity. The average returns are obtained by diversifying.

Buffett challenges the conventional wisdom regarding diversification. He argues that holding a few good stocks is far more important than spreading funds across a broad number of stocks. It is a fact that investors have been so oversold on diversification that the fear of having too many eggs in one basket has caused them to invest very little into companies about which they...

Other Papers Like Solution to Case Stury - Warren Buffett

case studies in finance Essay

557 words - 3 pages economic reality of the business and the book value only reflects the historical data which already happened in the past. CASE 1: Warren Buffett: a) From Warren Buffett’s perspective, what is the intrinsic value? According to Warren Buffett’s perspective, the intrinsic value is defined as “the present value of future expected performance” (Bruner, Eades,&Schill, 6th 2010). Why is it accorded such importance? It can be used to

Warren E Buffet Essay

3296 words - 14 pages Warren E. Buffett, 2005 Teaching Note Synopsis and Objectives Suggested complementary case about investment managers and superior performance: “Bill Miller and Value Trust” (Case 2). Set in May 2005, this case invites the student to assess Berkshire Hathaway’s bid, through MidAmerican Energy Holdings Company, its wholly owned subsidiary, for the regulated energy-utility PacifiCorp. The task for the student is to perform a

Afin250 Investments Group Assignment

3429 words - 14 pages diversification of portfolios and use of volatility timing. Success in this report is defined by Berkshire consistently outperforming Standard & Poor’s 500 Index (see exhibit 1; Buffett, W. 2014). It is discussed how the financial success behind this company is largely driven by its corporate culture set by current CEO Warren Buffet and how Berkshire assesses its acquisition prospects: the Graham and Dodd (G&D) valuation model by case study of

Essay of Warren Buffet

1465 words - 6 pages The Essays of Warren Buffet Lessons for Investors and Managers Selected, Arranged and Introduced by Lawrence A. Cunningham John Wiley & Sons, 264 pages Rating: 8 This is as near as you will get to a book “by” Warren Buffet, and for this reason more than any other, it is the best of the Buffet book bunch. Buffett has not actually written or published any book on investment, and all the other books are based upon insights gathered from

Warren Buffett

1003 words - 5 pages | Warren Buffett | The Leader I admire | | Nitesh Khadka BUS 500 Organizational Leadership 13th September, 2015 Dr.Kambiz Moghaddam Warren Buffett is the CEO of Berkshire Hathaway and one of the largest shareholders of it. He was born in August 30, 1930 in Nebraska. He was the second son of Howard Buffett, and Leila. Since his young age he was interested in investing and business. During his early age he started selling chewing gum

Warren Buffett

1570 words - 7 pages companies that will make you a profit, and you tend to follow companies with upward trends. At this time, there was a new interest in Berkshires Hathaway’s chief executive officer, Warren Buffett. The that time he was the second richest man in the United States, with a net worth of about $44 billion dollars. The general public had a great deal of respect for Warren Buffett, and valued some of his opinions. So if his company expanded, it was

Berkshire Hathaway Analysis

878 words - 4 pages variety sectors. In 2008, the revenues of the conglomerate had become $81.7 bn. Warren Buffett has been at the helm of affairs since the inception & still remains the current Chairman and CEO. Charlie Munger, who is his best advisor and has been attached since early days to Buffett is the current Vice-Chairman. Analysis After gaining some experience in investing in firms, his first moderately successful venture being the Dempster Mill

Care or Not

522 words - 3 pages Many people believe that people must be emotional to do better work. This is understandable. After all, there are a few outstanding stories about passionate individuals the persisted throughout obstacles. However, in general, It is actually better to remain reserved. Since a clear and rational mind will support better decision-making, it is much better to remain emotionally detached. Firstly, this concept is portrayed in Warren Buffett's life

Warren Buffet, 1995 Case Analysis

413 words - 2 pages Warren Buffet I. Point of View Warren Buffet – CEO of Berkshire Hathaway II. Statement of the Problem Warren Buffet’s decision to acquire GEICO at a 26% premium compared to the market price. III. Objectives a. To be able to understand the issue of the case. b. To be able to come up with a recommendation to help the company’s decision. IV. Areas of Consideration * Buffett’s investment philosophy. Buffett’s


1163 words - 5 pages To: Scott Anderson From: Yingguang Peng Re: Warren Buffet letter Date: 4/28/2015 Buffett's letter to the shareholders is the most valuable learning materials of value investors. The first page of the letter to shareholders is the comparison of Berkshire’s performance and S&P 500, in which the growth rate of per-share book value of Berkshire was 8.3% and that of S&P 500 was 13.7% in 2014. As Buffett has adopted book value recently, it is

The Dot-Com Crash in 2000

578 words - 3 pages market as a whole. Only by going through the cycles, the market is further developed through self-corrections. As a future business professional, what we need to learn from the bubbles are that, we need to build up our knowledge and insight of the market, and need to do enough due diligence in business and investment. Warren Buffett can be a good example for us. When the economy is going through cycles, with enough insight, we will need to make decisions such as "buy when everyone sell, and sell when everyone buy".

Related Essays

Solution To Nike Inc Case Study

2484 words - 10 pages the market value which is suggested as it gives more precise results - Calculation of the cost of equity using long time period for risk free rate and risk premium In order to make our justifications more comprehensive we need the formula for estimating WACC: WACC= Wd*Kd(1-T) + We*Ke First, we reexamine the cost of debt (Kd) which in this case is the yield to maturity (YTM) on the bonds. The YTM is a good estimate for the cost of debt if

Warren Buffet Biography Essay

769 words - 4 pages 11 WARREN BUFFETT The Omaha Miracle The Warren Buffett Bridge Cup to be exact. 12/ 16/ 2008 Business English 12 WARREN BUFFETT The Omaha Miracle In 2006 he announced to start spending some of his fortune to Bill & Melinda Gates’ charity foundations. 12/ 16/ 2008 Business English 13 WARREN BUFFETT The Omaha Miracle It’s 85% of his fortune! 12/ 16/ 2008 Business English 14 WARREN BUFFETT The Omaha Miracle Warren

Buffet Case Essay

703 words - 3 pages Warren Buffett Case Warren Buffett is the role model to all investors; therefore, I believe what he believed in is right (at least to him). However,we need to understand that not all of his rules work for everyone. Buffett's first rules is not to lose. The second rule is not to forget the first rule. He is absolutely right about this because risk management is always the key to success in investing. I think that valuing a share based on its

Warren Buffet Essay

1060 words - 5 pages summit of business excellence and has become the most judicious financial investor and is admired the world over. Warren Buffett is an investor's icon with a magnificent ability to select companies that will yield great profit year after year. Through Warren Buffett’s case study, we can see many financial principles. His principles aren´t very complex and you probably don´t have to be a mathematical or a social science genius to understand them