Warren E. Buffett, 2005
Warren E. Buffet, the chairperson and chief executive officer (CEO) of Berkshire Hathaway Inc., announced that MidAmerican Energy Holdings Company wanted to acquire the electric utility PacificCorp. The acquisition of this company had renewed public interest in its sponsor, even though his net worth is about $44 billion and also he and other insiders controlled 41.8% of Berkshire. “I will keep well over 99% of my net worth in Berkshire” was one of his main fundaments for the year 2005.By that time Warren held and MBA from Columbia University and credited his mentor, Professor Benjamin Graham with developing the philosophy of value-based investing that had guided him to his success. This company he wanted to acquire is called Berkshire Hathaway was incorporated as Berkshire Cotton Manufacturing, manufactured in 1989 and it eventually grew to become one of New England’s biggest textile producers, accounting for 25% of the United States cotton textile production.One previous year from Warren Buffet’s plans, in 2004, Berkshire Hathaway’s annual report described the form as a “holding company owning subsidiaries engaged in a number of diverse business activities” and it’s portfolio included: insurance, apparel building producers, finance and financial products, flight services, retail, grocery distribution and carpet and floor coverings. When Warren was a coauthor of Security Analysis with Graham the approach was to focus on the value of assets, such as cash, net working capital, and physical assets. Eventually, Buffet modified that approach to focus also on valuable franchises that were unrecognized by the market. He created a philosophy by 2005, he emphasized the following elements: 1. Economic reality, not accounting reality, in which he meant that accounting reality is conservative. 2. The cost of the lost opportunity, in which he held that there was no fundamental difference between buying a business outright, and buying a few shares of that business in the equity market. 3. Value creation: time is money which means that only in the instance where expected returns equal the discount rate will book value equal intrinsic value. 4. Measure performance by gain in intrinsic value, not accounting profit. Referring to those measures having the main purpose to focus on the ability to earn returns in excess of the cost of capital. 5. Risk and discount rates from which he quoted “I put a heavy weight on certainty. If you do that, the whole idea of a risk factor doesn’t make sense to me. Risk comes from not knowing what you’re doing” he also wrote “ the possibility of loss or injury … forgets a fundamental n it is better to be approximately right than precisely wrong” 6. Diversification: in which he disagreed with conventional wisdom that inventors should hold a broad portfolio of stocks in order to shed company-specific risks. 7. Investing behavior should be driven by information, analysis, and self-discipline, not by emotion or hunch. 8. Alignment of agents and owners
Finally Buffet stated that it was the firm’s goal to meet a 15% annual growth rate in intrinsic value. Bill Miller and Value Trust
In 2005, the company Value Trust, managed by William H. (Bill) Miller III, had outperformed its benchmark index, the Standard & Poor’s 500 Index (S&P 500), for an astonishing 14 years in a row. Over the previous 15 years investors could look back on the fund’s remarkable returns: and average annual total return of 14.6%, which surpassed the S&P 500 by 3.67% per year. An investment of $10,000 in Vale Trust at its inception, in April 1982, would have grown more than $330,000 by March 2005. Observer’s wondered what might explain Miller’s performance. Mutual funds served several economic functions for investors. First, they afforded the individual investor the opportunity to diversify his or her portfolio efficiently without having to invest the sizable amount of capital usually...
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