Warren Buffet - Book Report/Review Example

Summary about Warren Buffet Warren buffet is one of the most successful money makers in America. His total wealth is more than the combined GDP of half of the world’s countries. He owns over $40 billion dollars which he got from investing in other companies. He is a humble down to earth man despite his wealth and is unlike other wealthy individuals who are always on the negative side of the law. He was born in Omaha, and his father was a stockbroker, he was later elected to congress and he hence moved with his family to Washington. This is where Buffet learnt money making; he started businesses including selling of newspapers and even earned more than his teachers. After school, he went to New York to study investment under the guidance of Benjamin Graham, the author of the best-selling book, The Intelligent. He introduced Buffet to the behaviors in the market, and hence created the investing concept in him. He runs Berkshire Hathaway, a firm worth $150 billion; he has rented only one floor of Kiewit Plaza building located in Omaha where the Berkshire offices are located. He has a team of 25 employees who run the $150 billion dollar firm, and this is a unique feature not found in other companies; some lower valued companies have twice or thrice as much as the number of employees. This reduces the extravagant costs incurred by other firms. He reads all day leaves his personal secretary to take care of his other roles. At this age in time when everyone depends on computers to derive information especially on investment, buffet does not own a computer. He holds an annual shareholders meeting in which he addresses the shareholder, and his books are also sold at the shareholders meeting. He lives a simple life owning a house at Farnam in Omaha which he bought at $31,000 fifty years ago, this is unlike most billionaires and his car is also simple. Unlike other billionaires who fly to big hotels he dines in a local restaurant. One of his closest friends is Bill Gates, who is twenty years younger than him. He believes that the individual should think independently and not be based on the opinions of other people. He has a different way in investment; unlike in Wall Street he does not believe in speculating. According to him one should consider the returns of the firm and not the deviations in prices. Despite most of the investors at Wall Street using speculation, none is as rich as Buffet meaning his investment method is more efficient. Buffet has invested in firms that have ended up being very successful within years. Charlie Munger is the vice chair at Berkshire Hathaway, and he assists Buffet in investment. They invested heavily in Coca-Cola Company in the 80s putting a third of their income in this company and still hold the shares to date. Berkshire, therefore, still holds shares worth $10 billion; they also invested in American express and Disney. Over a decade the company has been growing at an average rate of 20% annually, this consistent growth is very rare in most cases. Buffet learnt to use the Moody manual to find secure companies to which he invested. He looked for undervalued companies from the manual. In the 1960s, he bought Dempster Mill at Beatrice in which was a major employer. He later sold the company in what is known as asset stripping and most locals lost their jobs and this made him unpopular with the residents. He, therefore, diverted to buying more successful companies. Berkshire Hathaway Inc. is an American multinational corporation headquartered in Omaha, Nebraska. The conglomerate multinational owns subsidiaries engaged in diverse business activities. The corporation is involved in both insurance and non-insurance business activities, where the insurance activities are conducted in both a primary basis and a reinsurance basis. The non-insurance business activities include energy generation and distribution, utility, and freight rail transportation businesses. At the end of every financial year, the company releases an annual report that includes a letter to the shareholders from the company’s chairman, Warren Buffet (1965-present). Each year, the chairman provides an overview of how the business has performed over the year in questions, the measures undertaken by the management and directors to improve performance, investment decisions made, financing decisions, and risk management among others. This paper presents a summary of lessons learnt from Warren Buffet’s letters in the Annual reports from 2010 to 2013. The chairman’s main focus lies on the intrinsic value of the firm’s share. The intrinsic value of a share can be described as the amount a shareholder would get per share during liquidation and after assets, and liabilities are settled. One of the main measures of a firm’s intrinsic values is the book value per share. As observed from the chairman’s letters, the company’s Book Value per share in 2010, 2011, 2012, and 2013 increased by 13%, 4.6%, 14.4%, and 18.2% respectively. According to Buffet in his 2010 letter, determination of the intrinsic value is not only a challenging task, but it is also subjective. In order to eliminate the subjectivity, the management uses an understated proxy- book value- when measuring their company’s performance. The three pillars of intrinsic value in the company include investments and insurance underwriting, earnings from non-insurance activities, and efficacy with which the retained earnings are will be deployed in the future. One of the techniques used to increase the intrinsic value is the increase of acquisitions. The chairman puts great importance in acquisitions. Each year since 2010, with the exception of 2012, the company made huge acquisitions. For instance, the company acquired Burlington Northern Santa Fe in 2010, Lubrizol in 2011, and NV Energy and a major of H.J Heinz in 2013. Investment in diverse business activities allows the company to diversify future earning risks. The company used some of its earnings to repurchase its stock at 110 % and 120 % of the market price in 2011 and 2012 respectively. According to Buffet, the decision of the stock repurchase is made on consideration of two areas. First, the company should have adequate funds to finance the repurchase. That is; the management must ensure that the liquidity of the firm is not adversely affected. Second, the decision to repurchase is made if the company’s shares are selling below the intrinsic value. Stock repurchase raises the intrinsic value of a share and improves future earnings of the firm. Buffet attributes the consistent increase of firm’s intrinsic value to management diversity, the business culture, and efficiency in operations. In his 2010 report, the chairman describes his team as being diverse. Diversity in management involves pooling of diverse skills of different people thus benefiting the company by strengthening the team’s responsiveness to varying conditions. He further reports that the business culture involves aligning directors’ and management goals with the goals of the shareholders. This is done by tying directors’ and managements’ compensation to performance. If the shareholders suffer a loss, the management compensation is affected too. This not only reduces the agency conflict, but also motivates the team. The company also reduced the cost of operation in 2013 through acquisition of Omaha World-Herald and 26 other daily newspapers in 2012. This reduced the cost of advertisement and improved the insurance and other services. Finally, risk management is a concept clearly outlined in the letters. The company hedges risks against economic losses through investment in financial assets and by use of derivatives. One of the derivatives used by the company is the ‘equity put.' The underlying asset of the put option is the company’s shares. The value of the put option is valued using the Black-Scholes model of option valuation. In conclusion, the financial statement shows that Berkshire Hathaway income before taxes has been increasing tremendously from 19051, 15314, 22236 to 28796 for a four years period since 2010 to 2013. Reference Berkshire Hathaway Inc. Annual Report. Nebraska: Berkshire Hathaway Inc. 2014. 20th July 2014. http://www.berkshirehathaway.com/reports.html Read More