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The Warren Buffet investment philosophies
1) Explain the Warren Buffett investment philosophies. Do you agree with them?
2) Calculate IRR of investment in Mid-American Corp. Finish the excel spread sheet in the attached excel file.
3) As for the investment of PacifiCorp, answer the following questions:
1. What does the stock market seem to be saying about the acquisition of PacifiCorp by Berkshire Hathaway?
Pay attention that stock prices are the present value of expected cash flows. How do the investors (shareholders) respond to the PacifiCorp announcement?
2. Based on your own analysis, what do you think PacifiCorp was worth on its own before its acquisition by Berkshire?
Does the bid price seem to be a fairly full-price offer for PacifiCorp? First estimate the implicit value of PacifiCorp with the information in exhibit 9 and 10 and compare the acquisition offer: 9.4 (4.3+5.1) billion.
3. Is the PacifiCorp acquisition a good or bad deal? Why?
The main contradiction is the full price and the positive market reaction to the announcement.
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The Warren Buffet investment philosophies
Warren E. Buffett, CEO of Berkshire Hathaway, is among the top-notch modern-day investors. He uses a classic approach to investing based on fundamental foundations learned from Robert Graham. Some of the core investment policies that Buffett uses ensure Berkshire strategically and critically analyzes an investment before committing. Buffett’s fundamental principle is that he has to have sufficient understanding of the business in order to invest.
In addition, it has to be a favorable choice in terms of the operational strategy, returns, long-term prospects, and leadership (Lane, 2017; John, 2016). For acquisitions, Buffett, as well as Berkshire prefer large purchases with consistent earning power, high ROE and low debt. This is in addition to a sensible price and an efficient management already in place.
The fundamental principles applied by Buffett in analyzing potential investments are a worthy breakdown of business investing. In this case, the use of this analysis is important is separating the worthwhile investments from the rest. In this approach, Buffett uses value investing as opposed to the growth investing methodology used by most investment bankers and analysts.
When compared, the cyclical period sometimes places some benefits on growth investing. However, by following the principles advocated by Buffett, and taking the purchases as long-term investments, one is sure to get better returns. Therefore I do agree with Buffett’s principles owing to the tangible benefits they beget.
The IRR of investment in MidAmerican Corp in the attached spreadsheet is 57.68%. A crosscheck with Calculate Stuff results in an IRR of 55.51%.
The stock market and the acquisition of PacifiCorp by Berkshire Hathaway
Using the stock market as an indicator, the acquisition of PacifiCorp by Berkshire Hathaway is a welcome move that yielded sufficient gains. The price purchase of $5.1 billion has created value as indicated by the share price movements. The stock price for PacifiCorp increased from a low of $113 in January 2013 to a high of $165 in January 2017 and a current share price of $145. As such, the share price metric indicates that the acquisition of PacifiCorp was a worthwhile investment.
Investors (shareholders) respond to the PacifiCorp announcement
Investors’ response to the deal to acquire PacifiCorp indicates their confidence in the value the utility firm will create for Berkshire Hathaway Energy. The deal increases the market value of Berkshire, and possibly the share price as well. This implies an increase in such additional valuations as the price to earnings. In addition, given Buffett’s investing philosophy, he is definitely getting a favorable price for it as compared to the market value of the firm….
Warren Buffet investment philosophies
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