Warren Buffett Case Study

Case Study Darden UVA-F-1160, Warren E. Buffett, 1995

Questions for Class Discussion

Subject: Introductory corporate finance case study. Topics: value creation, investment performance evaluation, basic DCF valuation, investment strategies. Note: Your answers will be mostly qualitative, but you should provide some quantitative answers where appropriate. (1) (2) What is the general THEME of this Case? (2-3 paragraphs)

What are the major elements of Buffetts investment strategy? List and briefly comment on the individual elements of his investment strategy. Do you agree, disagree with these elements? It would be hard to disagree with the most successful investor, but try to identify some statements that seem inconsistent with finance principles and explain why. Berkshires performance and its prior investments. Discuss what main criteria (what metric) you would use to evaluate the (past) performance of Berkshire-Hathaway (BRK) and Buffetts prior investments. What other criteria you need in order to claim that the performance was good (or bad)? How well has BRK performed? Evaluate BRKs earlier purchases of GEICO and other investments (e.g., Scott-Fetzer)? Provide some quantitative answers! Hints: Start with identifying (& estimating) investment cash flows. Calculate rates of return. You may need to employ some simple models (e.g., the Gordon Dividend Growth Model of stock valuation) to estimate some investment end-values. Acquisition of GEICO corp. by BRK in 1995. After BRK announced the deal in August 1995, the stock prices of GEICO and BRK changed. What is the possible meaning of these changes? What is the meaning of the market reaction in qualitative terms? Why did BRKs price go up? Specifically, what does the $718 million gain in BRKs market value of equity imply about the intrinsic value of GEICO? Based on Value Lines forecast (dividend & end-price information) : What is the range of possible intrinsic values of GEICO? What is the meaning of the term "intrinsic value" and what variables does it depend on? Hint: estimate the per share stock value in 1995 based on the case information in Table 1. What questions might you have about this estimated range? Should BRKs shareholders endorse the acquisition of GEICO and why? What are BRKs Acquisition Criteria?

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Warren Buffett case study assignment, updated June 2010