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CASEPRESENTATION
Rule No. 1:
Never lose
money. Rule No.
2: Never forget
rule No. 1
- WARREN
BUFFET
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Buffets Investment Philosophy
(1) Economic Reality, not
accounting reality
Economic reality is more
forward looking Accounts can be
manipulated as well Accounting reality
measures things at
historical cost/value
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Buffets Investment Philosophy
(2) Cost of lost
opportunity
Opportunity cost of an
investment Frame as either or decisions
(3) Value Creation: time
is money
Time value of money must be
considered for future cash
flows.
Better projection of future
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Buffets Investment Philosophy
(4) Measure performance bygain in intrinsic value notaccounting
profits
Positive NPV Earning returns greater
than cost of capital is
creating value even if
profits do not show it (ST
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Buffets Investment Philosophy
(5) Risk and discount
rates
Few investments will have risk and
maturity comparable to T-bills Use more realistic discount
rates
show actual risk
(6) Diversification Lack of perfect information in real
world Shield against unforeseen
circumstances
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Buffets Investment Philosophy
(7) Investing behavior
should be driven by
information, analysis
and self-discipline and
not by emotion orhunch
Research and gather information Analyze information and make
rational decisions
(8) Alignment of Agents
and Owners
Managing owners reduces
agency costs Incentives to encourage
responsibility
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+Should Shareholders endorseacquisition of PacificCorp?
YES NO
Huge customer base
Diversified portfolio of energy-
producing technologies
Parent company doing very
well better than S&P and BH
Possible greater emphasis on
renewable energy in the future
Energy prices speculated to
decline
Highly leveraged
Highly regulated industry
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+Should Shareholders endorseacquisition of PacificCorp?
n Difficult to decide whether they should endorse
theacquisition
n Trust Warren Buffet, management team and theirvaluation
methods
n In hindsight, definitely worth it
n 2005: Operating income of $656.4M
n Growth over the years
