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Warren Buffett:

The Oracle Omaha


Never Depend on Single Income. Make Investment to create a Second Source.
-Warren Buffet

In early 1980, investors could buy 1 share of Berkshire Hathaway Class A (BRK-
A) common stock for $285. That may have seemed expensive at the time, but by mid-
2004 the price of just one share had climbed to more than $86,500. The wizard behind
his phenomenal growth in shareholder, value is the chairman of Berkshire Hathaway,
Warren Buffet, nicknamed, “The Oracle of Omaha”.

Born in 1930, Buffet practiced his entrepreneurial skill as a teenager by delivering


newspaper in Omaha, Nebraska, and he made his first stock purchase at the age of 11.
Buffet studied economics at Columbia University, under two professors, Benjamin
Graham and David Dodd, who were proponents of value investing. Graham was
particularly noted for advocating the principle of intrinsic business value, the measure of
the company’s true worth independent of the stock price.

After finishing his formal education, Buffet began his investment career in
Earnest. While running several investment partnerships, he purchased a struggling New
Bedford, Massachusetts textile mill called Berkshire Hathaway. By employing the
company’s capital in other ventures, Berkshire Hathaway soon became an investment
vehicle rather than textile mill. Indeed, the original textile mill assets were disposed of in
1985.

In the years since then, Buffet has pursued strategy of buying up entire
companies or taking a large stock position if he feels a company’s stock is under-priced
relative to the true value of its assets. For example, consider some of Berkshire
Warren Buffett:
The Oracle Omaha
Hathaway’s holdings in mid-2004: 8.2% of coca cola (since 1984), 11.8 of American
Express Company (1998), 9.5% of Gillette (1989) and 18.1% of the Washington Post
(1973). Ignoring hot investment trends, Buffet looks for undervalued companies with low
overhead, high growth potential, strong market share and low ratio of the stock price to
the company’s earnings (P/E ratio).

Berkshire Hathaway’s annual report is “must read” for many investors, due to the
popularity of Buffet’s annual letter to shareholders with his homespun take on such
topic as investing, corporate governance and corporate leadership. Berkshire
Hathaway’s annual shareholders meetings in Omaha have turned into a cult-like
gathering each year, with thousands traveling to listen to buffet answer questions from
shareholders. One question that has been firmly answered is the question of Buffet’s
ability to create shareholders value.

Questions:

1. The share price of BRK-A has been never split to make the shares more
affordable to average investors. Is this a good company strategy? Why?

2. Is Buffet’s strategy of buying under-priced companies stocks instead of Hot


investment trends applicable nowadays? Why?

3. Is a low ratio of the stock price to company’s earnings (P/E ratio) a good buy?
Why?

Source: Introduction to Managerial Finance, 11th Edition


Warren Buffett:
The Oracle Omaha
Introduction

Our team was mind boggled and is left in awe,


considering the fact of substantial difference from
1980-2004 that has taken place at Berkshire
Hathaway, in just about more or less 24 years, Warren
Buffett pulled it together amazingly, imagine a single
$285 worth share of stock from year 1980 became
$86,500 in year 2004, a seemingly magic so to speak,
how he has done what he did! Phenomenal simply was
the description as per presented by the case problem. The Oracle of Omaha is a
nickname for Warren Buffett, who is arguably one of the greatest investors of all time.
He is called The Oracle of Omaha because his investment picks and comments on the
market are very closely followed by the investment community, and he lives and works
in Omaha, Nebraska. Buffett is the chairman and CEO of Berkshire Hathaway, a
company that he became the controlling shareholder of in the mid-1960s.

Indeed a genius trader and investor, in a way he sees more than just the façade
of a company, he is regarded as one of the richest men in the world. He built his fortune
using a simple yet powerful investment strategy, that is by looking beyond what is
visible, he deviced an investment scheme that measures long-term positions,
accomplished by the purchase of fundamentally sound companies that are trading well
below their intrinsic value, this means that such companies is given less market share
than what they actually deserved. To name, some of his most known investments
include Coca-Cola, Gillette and Dairy Queen. As of 2018, The Oracle of Omaha is
estimated to have a net worth of $90 billion.
By assessing the real value of a company he draws out favourable outcomes and
return of his target company. This strengthens the idea of what we call forecasting, as
Warren Buffett:
The Oracle Omaha
such a sound forecasting became his major tool to success. Warren Buffet is a value
investor; and he likes a company to have a low debt/equity ratio; he wants earnings
growth generated from shareholder’s equity as opposed to debt. The Oracle of Omaha’s
quote “It’s far better to buy a wonderful company at a fair price than a fair company at a
wonderful price” sums up his investment philosophy. He is one of the wealthiest and
influential people in American business today. He is the second-richest member of the
Forbes 400 with a net worth of 80.6 billion USD, according to Forbes in 2017. Living and
working in Omaha, Nebraska, Buffet was nicknamed the "Oracle of Omaha" due to his
investment selections and commentary from the larger Omaha community.

In this case study we seek to explain three grounds, first, his strategy of how he
increased the market value of Berkshire Hathaway but not splitting them several for
average investors. Which generally goes against the basic idea or foundation of
companies selling stocks which our group described as “the more the merrier”.

Secondly, another area worth immersing for is his idea of buying companies with
less value compared to the “should be” or the company’s actual value or potential and
comparing such methodology today.

And lastly, the price to equity ratio and its use for investors.
Warren Buffett:
The Oracle Omaha
Background

To make this study effective and efficient it is a definite requirement to study and
take a glimpse of the life of our main actor, Warren Buffet.

Warren Buffett was born in Omaha, Nebraska, in 1930 to parents Howard and
Leila Buffett. The Oracle of Omaha’s father was a stockbroker, which gave him an early
introduction to the stock market. Buffett purchased his first stock at age 11; he bought
three shares of Cities Service Preferred for $38 per share and sold them at $40 per
share. After he sold the stock, it advanced to $200. On reflection, Buffet believes this
taught him the virtue of patience. Buffett demonstrated business prowess from his early
teens, running a paper delivery business and completing his own tax returns. The
Oracle of Omaha started a pinball machine business while in high school and went on
to sell the business for $1,300. He graduated from the University of Nebraska with a
business degree.

Buffett enrolled at the University of Pennsylvania at the age of 16 to study


business. He stayed two years, moved to the University of Nebraska to finish up his
degree, and emerged from college at age 20 with nearly $10,000 from his childhood
businesses.

In 1951 he received his master's degree in economics at Columbia University,


where he studied under economist Benjamin Graham, and furthered his education at
the New York Institute of Finance.
Influenced by Graham's 1949 book, The Intelligent Investor, Buffett sold
securities for Buffett-Falk & Company for three years, then worked for his mentor for two
years as an analyst at Graham-Newman Corp.
Warren Buffett:
The Oracle Omaha
As for 2018, Buffett has an estimated net worth of $84 billion.
Between 2006 and 2017, Buffett has given away close to $28 billion in charity,
according to a report by USA Today.

Source: https://www.biography.com/business-figure/warren-buffett

Now going to the place where Warren Buffet performed his magic trick.

Berkshire Hathaway Inc. is an American multinational conglomerate holding


company headquartered in Omaha, Nebraska, United States. The company wholly
owns GEICO, Duracell, Dairy Queen, BNSF, Lubrizol, Fruit of the Loom, Helzberg
Diamonds, Long & Foster, FlightSafety International, Pampered Chef, and NetJets, and
also owns 38.6% of Pilot Flying J; 26.7% of the Kraft Heinz Company, and significant
minority holdings in American Express (17.6%), Wells Fargo (9.9%), The Coca-Cola
Company (9.4%), Bank of America (6.8%), and Apple (5.22%). Since 2016, the
company has acquired large holdings in the major US airline carriers, and is currently
the largest shareholder in United Airlines and Delta Air Lines, and a top three
shareholder in Southwest Airlines and American Airlines.[5] Berkshire Hathaway has
averaged an annual growth in book value of 19.0% to its shareholders since 1965
(compared to 9.7% from the S&P 500 with dividends included for the same period),
while employing large amounts of capital, and minimal debt.

The company is known for its control and leadership by Warren Buffett, who serves as
chairman and chief executive, and Charlie Munger, the company's vice chairman. In the
early part of his career at Berkshire, Buffett focused on long-term investments in publicly
traded companies, but more recently he has more frequently bought whole companies.
Berkshire now owns a diverse range of businesses including confectionery, retail
, railroads, home furnishings, encyclopedias, manufacturers of vacuum cleaners,
Warren Buffett:
The Oracle Omaha
jewelry sales, newspaper publishing, manufacture and distribution of uniforms, and
several regional electric and gas utilities.

According to the Forbes Global 2000 list and formula, Berkshire Hathaway is the third
largest public company in the world, the tenth largest conglomerate by revenue and
the largest financial services company by revenue in the world.

Berkshire is currently the seventh largest company in the S&P 500 Index by market
capitalization, and is famous for having the most expensive share price in history with
a Class A share costing around $300,000 each. This is due to the fact that there has
never been a stock split and Buffett has stated in a 1984 letter to shareholders that he
does not intend to do so.

Buffett caught the investing bug at the University of Nebraska, where he read
Benjamin Graham's "The Intelligent Investor." Graham's book advised investors to seek
out stocks that trade far below their actual value, that deliver a margin of safety and that
sell below their intrinsic value. He thoroughly researches businesses and only buys
them at discounted prices. This practice, which was essentially invented and defined by
Graham, gives him a so-called "margin of safety" on all of his investments. This margin
of safety is the difference between a business's intrinsic value and its share price.
Buffett invests in businesses with superior economic characteristics that are
controlled by successful, skilled management teams. He also looks for companies with
long histories of above-average earnings growth. And unlike many other investors,
Buffett does not pay attention to stock market fluctuations, macroeconomics and
market predictions. Instead, he merely sticks to his long-term investing plan. As long
as a firm's fundamentals do not change, Buffett will not sell -- even in times of economic
crisis.
Warren Buffett:
The Oracle Omaha
Below are a few other characteristics that Buffett looks for when evaluating
an investment opportunity.

 Easy-to-Understand Businesses
One of Warren Buffet's principles is not unlike Peter Lynch's -- stick with what
you understand and choose investments with which you are comfortable. Buffett,
arguably one of the greatest and most revered stock-pickers of all time, says
investors shouldn't complicate things by seeking out complicated companies.
Along those lines, the world's savviest investor has kept Berkshire Hathaway
away from fast-growing technology stocks. Buffett admits that he just doesn't
understand technology well. As such, he avoids the industry altogether. Before
investing in any business, Buffett attempts to predict what the company will look
like 10 years in the future. High-tech markets change too fast to look that far
ahead with any confidence.
 High Return on Equity (ROE)
Buffett emphasizes return on equity (ROE), a key measure of a company's
profitability. He prefers to invest in companies where he can confidently forecast
future ROEs at least 10 years out. He is particularly fond of firms that don't
require a lot of capital, as they tend to produce much higher returns on equity.
 Consistently Strong Free Cash Flow
Buffett also seeks companies with significant free cash flow. Always mindful of
the risks associated with investing, he ensures that his companies have plenty
of money left over to invest in their growth after they have paid the bills.
 Limited Debt
In the 1990s, Buffett bought insurers Geico and General Re because he liked
how the companies limited and managed their debt. Buffett also likes the "float"
that insurance companies offer. Policyholders pay premiums up front, but claims
are paid out later -- providing insurance companies with a steady stream of low-
Warren Buffett:
The Oracle Omaha
cost cash to play with. Until policyholders collect on their policies or claims, the
company can invest those billions in stocks/bonds or other areas, and who better
to invest that money than Buffett himself?
 Quality Management
Among the most noteworthy aspects of Buffett's stock-picking expertise is that he
looks for quality companies with quality management teams. When Buffett buys a
business, he buys its management as well. Buffett looks for people who are as
passionate about their business as he is about investing.

The idea behind no stock split!

Warren Buffett has never done a stock split of Berkshire Hathaway Class A
shares (BRK-A), and he has flatly stated that Class A shares will never undergo a split.
Buffett's reasoning for not doing a stock split of BRK.A is right in line with his
basic investment philosophy.

Buffett's investment approach has always been that of a buy-and-hold investor


focused on value and long-term growth – the polar opposite of an intraday trader. In line
with this fundamental approach to investing, he believes that allowing the price of
Berkshire Hathaway Class A shares to remain at a level that encourages purchasing the
stock for the long term, rather than trading in and out of it, attracts the same type of
investor as himself – that is, investors with an extended investment horizon and
investing strategies.

Another potential reason is that the Oracle of Omaha derives some satisfaction
from Berkshire Hathaway being, far and away, the most expensive stock in the world.

Buffett created Berkshire Hathaway Class B shares (BRK-B), which sell for a
small fraction of the price of Class A shares, with the stated purpose of enabling retail
investors to buy Berkshire Hathaway stock directly. Berkshire Hathaway did a split of
Warren Buffett:
The Oracle Omaha
the Class B shares in 2010, and not at the traditional two to one or three to one rate, but
at a rate of 50 to one. While some might argue that this action is contradictory to
Buffett's stated no-split policy on Class A shares, it is in fact logically right in line with his
rationale for the creation of the Class B shares – to make (and by doing the split, to
keep) Berkshire Hathaway stock affordable to smaller investors.
Warren Buffett:
The Oracle Omaha
Evaluation of the Case

This study shall focus on the following:

 As explicitly stated, in the case the time setting occurred during the year 1980,
where Berkshire Hathaway’s was in it’s affordable selling price. Another
comparative time-period was on mid-2004 wherein the price per share of the
company reached its highest market value without splitting shares.

The key was diversification, Warren Buffett applied such principle that inevitably
made stock price per share go up by $86,215 higher. Even considering inflation
and other factors such as time value of money and rate of returns such up soar is
undeniably epic! No Splitting of shares derived from the idea and his philosophy
of keeping long term relationship with the investors besides Class B shares is
offered in relatively lower price than class A shares

 Undervalued companies (value)

A keen eye coupled with good educational background served as his major
asset, by utilizing this and applying simple yet effective measures he came up
with a way to see the real intrinsic value of a company.

 The relationship of price and equity to asses value of company’s potential

Price Interest rate Demand for share Supply Earnings


Warren Buffett:
The Oracle Omaha
Solution

The shares of stocks increase is due to the effort of Warren Bufffet, by inducting
diversification strategies not limited to insurance petroleum, construction, clothing
logistics, aero-space defence, food and beverages, Wholesale and Manufacturing,
Wholesale and Manufacturing and others, too many to mention.

Berkshire Hathaway has a computed net worth of $618.1 billion, as of June


2018 according to www.gobankingrates.com (https://www.gobankingrates.com/making-
money/business/how-much-is-berkshire-hathaway-worth/)

An undervalued company only means one can derive better opportunities relative
to the company, thus Warren Buffet takes this risk. Nowadays buying an undervalued
company and make upto its lackings is not easy, it entails too many planning and
testing. One has to be highly qualified and skilled to put up and accomplish such
feature. It goes by the saying if you have it then flaunt it, in which Buffetts case if you
have it apply it.

In the case of stock split, Buffett sticked to his belief that keeping investors for
long-term mutual trust and benefit is much more preferable than buying and selling
stocks on and on. The idea is buy and hold. This case study had already disclosed
other feats why Buffett chose not to do stock splitting at least to Class A shares.
Warren Buffett:
The Oracle Omaha
Warren Buffett:
The Oracle Omaha
Recommendation

Upon dealing with the courses of action undertaken by Warren Buffet, it is


concluded or recommended the readers of the following:

 The mere fact that buying undervalued companies is risky, our subject pulled it
altogether by formulating his effective strategies that led to astonishing results, a
commendable mental strength and will.

 If you have it apply it, really, it may not be advisable to buy undervalued company
shares but Warren Buffett pulled it together, one has to have what Buffet has and
the rest will follow. In practical application, our group agreed to not buy stocks
this is due to the many constraints and time requirement that you have to meet.

 We also recommend stock split which is a necessary step to achieve company


growth, besides the principle is, the more the merrier, since a company is initially
owned by many, revenues from operation may not supply the expansion or
diversification plans, thus stock offerings by splitting stocks render such shares
reachable by the lower society in mind of investing.

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