This case is about Berkshire Hathaway’s rise to success.

Warren Buffett and a couple of

his peers acquired the company and completely turned it around into a successful company.

Warren Buffet wrote several letters describing the keys to success in his investments. In 2015,

Buffett acquired Precision Castparts Corporation, his largest investment ever. Overall, this case

is a description of Berkshire Hathaway’s turnaround by Warren Buffett and what is to come next.

1. Warren Buffett is the chair and CEO of Berkshire Hathaway Inc. He is one of the

richest people in the world. He is so renowned to the public because his ways of investing are out

of the ordinary to most people. He has never sold a share in his life, but this seems to work out

for him. His net worth comes to about $66.5 billion. He is also very respected by his peers. He

only pays himself $100,000 per year from Berkshire Hathaway stating he wants to keep well

over 99% of his net worth in Berkshire. He has been one of the most successful investors ever to

exist.

2. The company Berkshire Hathaway as of 2014 has a diverse portfolio of businesses.

Berkshire Hathaway owns subsidiaries that are a part of 6 different business industries,

Insurance, Railroad, Utilities and Energy, Manufacturing, Service and Retailing, and lastly

Finance and Financial Products. Berkshire Hathaway’s company strategy is to diversify their

company involvement into numerous different business industries by constantly reinvesting its

interest. Berkshire Hathaway is doing this to limit the risk for the company if the economy

begins to develop like it did in 1955 or if certain industries in the economy begin to fail.

3. Warren Buffet’s investment philosophy is called value investing. This philosophy

identifies undervalued stocks whose prices are less than their intrinsic value. The elements of this

philosophy include economic reality, the cost of the lost opportunity, the time value of money,

measuring performance by gain in intrinsic value, setting a required return consistent with the
risk you bear, diversifying reasonably, investing based on info and analysis not emotion, and

looking for market inefficiencies. There are a few main differences between Buffet’s investment

strategy and day trading. The first is time periods, value investing involves holding stocks for a

long period of time whereas trading holds stocks for a short period of time. The second

difference is risk. Value investing is less risky than trading because trading depends on daily

stock price movements. The third difference is research. Value investing requires a lot of

research while trading is based on charts and momentum of stocks.

4. He invests heavily in companies who have shown a strong power in their market. They

have been around for a large amount of time, and it shows they can survive though the changing

market. Over the time of his investments all but one has created more market value than its cost.

This shows they were mostly good investments. The top two are the most successful

investments. Looking at the kinds of companies that they are, they match the requirements of the

kinds of companies that he sees an intrinsic value in that they would buy. They are well-known

franchises who have long-term economic value. Overall, they are all successful but not

uniformly successful. This is caused by some of the investments having a larger gap between its

intrinsic value and market value.

5. Intrinsic value is the increase of worth from the time value of money and the

opportunity costs. It shows if the investment in the company will create more value than a set

discount rate. It is estimated by looking at what the value could be if invested into a company or

into something like a government treasury bond. It is calculated by finding the total future free

cash flows and discounting them with a discount rate based on the gain of a similar risk profile.

This gives a present value to the future cash. This is added up and multiplied to a required rate of

return that could have been done as an alternative. This shows if the company is more efficient at
using the money to create value than the minimum gain that you require. This decides if it will

create more value from the money than the alternative opportunity. The alternative to intrinsic

value is its market value that looks at the accounting profit. Buffett rejects it because he believes

that it is more important to look at how well a company creates value than its profit. He cares

about the long-term when investing. He knows that if an intrinsic value is higher than the market

value it will grow to become the market value over a long time.

6. Berkshire Hathaway’s acquisition of PCP lead to the market ascribing a $4.05 billion

loss in value to Berkshire Hathaway. After the acquisition, the value of PCP spiked more than $5

billion, close to 20% of the market value of the firm. Berkshire Hathaway’s loss in value and

PCP’s gain suggests that the market believed Berkshire Hathaway had overpaid for the

acquisition. The loss in Berkshire Hathaway’s market value suggests that analysts believed the

intrinsic value of PCP was overvalued. Berkshire Hathaway looked for well-run businesses

producing consistent results and PCP fit that build. Although the market believed PCP was

overvalued Buffet and Berkshire Hathaway disagreed. Berkshire believed the intrinsic value was

higher than the market suggests.