WARREN BUFFETT
CASE 1: WARREN BUFFETT
a) From Warren Buffett’s perspective, what is the intrinsic value?
From Warren Buffett’s perspective, intrinsic value is the value will affect the future value performance of investment and business. It is defined as “the discounted value of the cash that can be taken out of a business during its remaining life” (Bruner, 2010).
Why is it accorded such importance?
In view of the fact that the intrinsic value is the “only logical way” (Bruner, 2010) which help investor to identify whether the investments and businesses are worth to do.
How is it estimated?
It is estimated by the calculation of discounted cash flows and it will be affected by change of interest rate during business life.
What are the alternatives to intrinsic value?
Book value (historical input) and accounting profit are alternatives to intrinsic value.
Book value is the company’s total assets minus liabilities.
Accounting profit is the difference between revenue and cost of the business.
Why does Buffett reject them?
Through the case of education, we can see compare with the intrinsic value, the book value for an investor is meaningless. For the accounting profit, it is mainly focus on the financial performance. Both of them are not concern about the future returns of an investment.
b) Critically assess Buffett’s investment philosophy. Identify points where you agree and disagree with him.
There are eight Buffett’s investment philosophies in the case.
1. Economic reality is more important than accounting reality. I agree with that because there are some intangible assets which not under the GAAP can affect the company.
2. I support that compare the different between investment revenue and other return is significant.
3. Use the intrinsic value as the stand to evaluate the company’s performance. In comparison with the book value, intrinsic value can more accurate to evaluate a company whether or not worth to be invested.
4. Buffett’s think that
a) From Warren Buffett’s perspective, what is the intrinsic value?
From Warren Buffett’s perspective, intrinsic value is the value will affect the future value performance of investment and business. It is defined as “the discounted value of the cash that can be taken out of a business during its remaining life” (Bruner, 2010).
Why is it accorded such importance?
In view of the fact that the intrinsic value is the “only logical way” (Bruner, 2010) which help investor to identify whether the investments and businesses are worth to do.
How is it estimated?
It is estimated by the calculation of discounted cash flows and it will be affected by change of interest rate during business life.
What are the alternatives to intrinsic value?
Book value (historical input) and accounting profit are alternatives to intrinsic value.
Book value is the company’s total assets minus liabilities.
Accounting profit is the difference between revenue and cost of the business.
Why does Buffett reject them?
Through the case of education, we can see compare with the intrinsic value, the book value for an investor is meaningless. For the accounting profit, it is mainly focus on the financial performance. Both of them are not concern about the future returns of an investment.
b) Critically assess Buffett’s investment philosophy. Identify points where you agree and disagree with him.
There are eight Buffett’s investment philosophies in the case.
1. Economic reality is more important than accounting reality. I agree with that because there are some intangible assets which not under the GAAP can affect the company.
2. I support that compare the different between investment revenue and other return is significant.
3. Use the intrinsic value as the stand to evaluate the company’s performance. In comparison with the book value, intrinsic value can more accurate to evaluate a company whether or not worth to be invested.
4. Buffett’s think that