Warren Buffet

(Warren E. Buffett, 2005)

Mergers and Acquisitions

1. What is your assessment of Warren Buffet’s investment philosophy? Explain where you agree or disagree with him?

There are similarities and dissimilarities of his philosophy as compared to principal and theory of finance. For example, like the principal and theory of finance, he uses the time value of money in calculating intrinsic value, the use of intrinsic value in measuring performance, the use of fundamental analysis in assessment investments, and the use of corporate governance. However, there are many dissimilar philosophies to the principle and theory of finance such as investment opportunity evaluation, CAPM, and portfolio diversification.

I recently read somewhere that a $10,000 investment in BH in 1965 grew to be worth nearly $30 million by 2005? By comparison, $10,000 in the S&P 500 grew to only about $500,000. It is very difficult to dispute or disagree with any particular portion of his philosophy based on these figures. However, I generally disagree with his interpretation of risk and philosophy on diversification. Even if there is a focus on companies with predictable and stable earnings, there is always some measure of risk associated with an investment - risk is not necessarily derived from ignorance. In regards to his diversification philosophy, not all investors have the opportunity to sit on boards, or have special access and resources at their disposal. By reviewing the 2004 BH annual report, it is evident that that his holdings are rather diverse – is the strategy not to be industry or company specific?

2. Why does Buffet place such importance on the concept “intrinsic value”? What are alternatives to intrinsic value and why does Buffett claim to reject them? Do you agree?

If we agree that Buffet is a value investor, then the essence of value investing is buying stocks at less than their intrinsic value. Buffet held that there was no fundamental difference...