Warren Buffet Case Study

Case Study A: Warren Buffett

The CEO of Berkshire Hathaway, Warren Buffet, announced in August 1995 that his firm was going to purchase the shares that it did not already own in GEICO, an auto insurer. (Case Study: 2) The effect of this announcement on the Berkshire Hathaway share price indicates that investor sentiment, apropos the deal, is positive. However, a more comprehensive analysis of this situation is required in order to determine whether the takeover is in keeping with the company’s long term goals and how appropriate the significant premium is that Buffett proposes to pay for the shares.

Over the years Buffett has combined his formal investment training under Professor Graham with his experience as a fundamental analyst to formulate his own investment philosophy (Case Study: 3, 6). Some parts of it are in complete contrast to conventional financial thinking, but his success certainly leads an investor to question what they have been taught. It is important to note that because Buffett is a fundamentalist he believes that the true value of a share is determined by analysing the firm’s current and projected financial position. Accordingly he disagrees with the Efficient Market Hypothesis (EMH), arguing that it causes investors not to think about their decisions as they believe that the price will automatically reflect all information and that it is impossible to consistently earn abnormal returns (Case Study: 10).

The first tenet of this philosophy is that economic values and not accounting values are the basis for making investment decisions. Financial statements are prepared according to stringent rules and regulations as set out in GAAP which focus on net profit and as such do not accurately portray exactly what has happened in the company during the year in terms of cash flows. Furthermore, factors such as intangible assets which will undoubtedly have an influence on the future performance of the company and upon which fundamentalists...