assessment on Big Four

Topics: Berkshire Hathaway, Stock, Discounted cash flow Pages: 3 (1439 words) Published: October 28, 2014

Warren Buffet’s well-disciplined investment principles, which aims to maximize per-share intrinsic value, manifested in his renowned acquisitions of the “Big Four”, namely the American Express Company, The Coca-Cola Company, The Gillette Company, and Wells Fargo & Company. The total cost to purchase the stocks of the four companies was $3.832 billion, and by year-end of 2004, the total market value of the stocks were $24.68 billion, which is equivalent to a time weighted return of (24.68/3.832) ^ (1/12.5) -1 = 16.07% per annum from 1992 to 2004. The portfolio has outperformed the S&P 500 index, which had achieved a time weighted return = (1211.92 / 413.83) ^ (1/12.5) -1 = 8.97% per annum during the same period. The Big Four were classic American brands that possess rigorous business models, while providing predictable and stable earnings every quarter. They possess extremely valuable intangible assets, such as trademarks and reputation that are inestimable by accounting reality. Most importantly, Buffett had his eyes on their intrinsic values derived from their future cash flows. He was asserted that stock prices were largely discounted from their intrinsic values, which created gaps for arbitrage opportunities. This belief causes opposition debates from modern analysts who mostly believe in the market efficient hypothesis, which theorizes that stock prices reflect all available information known to investors. Nevertheless, his acquisitions of the Big Four were immensely successful and remained as legacies. Warren Buffett’s Coca-Cola acquisition in 1988 displayed his investment principals: simplicity of business, sound management, and irreplaceable comparative advantage. Coca-Cola’s reputable brand has allowed it to sell its product at high profit margin (12.53% as of Dec 1988). However, what Buffett admired the most was the management of CEO Robert Goizueta, who gave the product “new momentum, with sales overseas virtually exploding.” He was...
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