Problem Case Study of Buffett

STATEMENT OF THE PROBLEM

As of August 25 year 1995, the CEO of Berkshire Hathaway; Warren Buffett attempt for the 49.6% of GEICO Corporation that it does not already own. So the problem or issues that company faces would be:

First, risk and return. More or less if Buffett doesn’t understand, probably he stays away from it and studied the things he knew to make him more master or knowledgeable about investment. Buffett is not satisfied with just the minimum. He wanted huge returns on every dollar to earn more. To Buffett wealth is not about a huge returns but it’s all about the satisfaction. And that’s the key to wealth.

Second, economic vs. accounting reality. Buffett agree and disagrees with modern financial theory. He agrees about the time valuation of money and disagrees such as: He ignores balance sheet, income statement and intangible assets such as patents, trademarks, reputations etc. He measures performance by gain of intrinsic value not like executives who is in favor of accounting profit. He does not believe in the practice of diversification to reduce risk. Instead he was convinced about “do not feel ignorant; the need for diversification goes down”. He was able to adopt his use of conventional tools. He qualified the CAPM and used US treasury bonds to avoid risk. The problem shows also about the time valuation of money, the future dividends will flow directly to Berkshire Hathaway.And the agency issues about the alignment of agents and owners.

Third, decision making. Buffett know how to relate business in a genius way and how market trends. Whether low or high, greater or less he understood about the value of business. He would research for about months but sometimes it only took him hours to make a multi-million dollar decision. Investment decisions should be by information self-discipline not by emotion.

To cover it all the problems that the company faces probably are risk and returns economic vs accounting reality and decision making. It also...