Warren Buffett, 2015

Luis Beraldo – Case 1: “Warren Buffett, 2015”.  

• CEO of Berkshire Hathaway. Berkshire Hathaway is a multinational conglomerate holding company, who owns GEICO, Dairy Queen, and owns part of the coca cola company, bank of America, and apple.
• Started as Berkshire Cotton Manufacturing in 1889, grew to be one of the biggest textile producers in the US. Merged with Hathaway Manufacturing in 1955, and in 39 years they grew 305,614%, annualized 22.8%
• Coca-Cola has grown from $38.84 to $47.57 in the last 5 years, Amex has gone from $86.95 to $100.48, P&G stock has gone from $79.18 to $91.42, and Wells Fargo has gone from $45.37 to $49.86. They are solid investments, and they have grown slowly, but steadily, however, based in stock price alone, it doesn’t seem like they have grown in a rate of those investments Warren Buffett makes.
• Buffett has modified a method created by a professor at his university that identifies undervalued stocks, his modified method is adapted to work with valuable franchises that were ‘unrecognized by the market’. Buffett’s strategy ignores GAAP, since he claims it might not reflect economic reality, only accounting reality. Buffett was a fundamental analyst, judged simplicity, consistency of its operating history, attractiveness of its long-term prospects, quality of management, and capacity to create value. It seems that unlike day-trading, Warren’s strategy was solid companies to invest in a long-term, yet, unlike chart watcher, he doesn’t stick to GAAP measures, since it doesn’t measure Economic Reality.
• Intrinsic value for Buffett is the discounted value of the cash that can be taken out of the business during its remaining life, and it’s important to evaluate the relative attractiveness of investments and business. An alternate option to intrinsic value is GAAP, however he claimed that “all other methods fall short in determining whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value for his investments”.
• Buffett’s investment philosophy of evaluating the economic reality of his investments, which accounts for intangible assets is better than GAAP alone, which won’t consider experience of managers, or patents. Also applying the lost opportunity cost, that we use on a daily basis, but expanding to businesses. A philosophy that I don’t agree with is using a 30 year US Treasury Bond Rate of Return instead of CAPM, because he considers his investments to not carry much risk.
• Berkshire Hathaway stock went down $4bi, but its intrinsic value went up. Once Berkshire Hathaway announced the purchase of PCP, its stock went up by 19%, meaning that Buffett saw PCP as an undervalued business, and a good investment.
• PCP shows strong numbers, even considering that NI went down from its prior year. So, in my opinion, yes, they should endorse the acquisition.