MGMT 702 (401) CRAFTING AND EXECUTING STRATEGY

Fall 2021: Professor Jai Goolsarran

Research and Case Analysis No. 1 (10%): Part B (Warren Buffett and
Berkshire Hathaway Inc.)

Directions: Please use this Word document (and no other document of yours) and
provide your word-processed answers immediately below each of the questions
asked and send your completed work back to me by e-mail as an attachment to
your e-mail by Sunday, October 03, 2021, 6.00 am Toronto time. My e-mail
address is:

jgoolsar@my.centennialcollege.ca

Student name and number: Daniel Rios Escorche, 300813860

Please consult the 2017 Annual Report of Berkshire Hathaway Inc. and answer the
following questions fully and clearly and in separate and numbered paragraphs.

1. Review the data provided at page 2 of the Annual Report. If you had invested
$100 in Berkshire Hathaway Inc. on January 01, 1965, what would that
investment be worth by the end of 2017? Be sure that you provide your
calculations. (2 marks)
53
FV =100 ¿(1+0.191) =1,055,172

2. Review the Letter to the Shareholders of Berkshire Hathaway Inc. (pages 3 to

26 of the Annual Report). Then, focus on Buffett’s discussion on the company’s
insurance business and prepare a clear statement as to why Buffett has found
the insurance business to be an attractive one. (4 marks)

The insurance business is attractive due to the delivery of underwriting profit and the
“float” that it is money that belonged to others but was held by our two insurers.

 Premiums are generally paid to the company upfront, whereas losses occur over
the life of the policy, usually a six-month or one-year period.

 Though some losses, such as car repairs, are quickly paid, others – such as the
harm caused by exposure to asbestos – may take many years to surface and
even longer to evaluate and settle.
  Loss payments are sometimes spread over decades in cases, say, of a person
employed by one of our workers’ compensation policyholders being permanently
injured and after that requiring expensive lifetime care.

3. List, in numbered fashion, the companies in which Berkshire Hathaway Inc. had
significant common stock investments. And do you think that you yourself would
recommend this portfolio of companies to an investing client of yours? Be sure
that you explain your answer clearly and fully. (4 marks)

Percentage
Company Name of Company
Owned
   
1.- American Express 17.6
2.- Phillips 66 14.9
3.- Moody's Corporation 12.9
4.- Wells Fargo & Company 9.9
5.- The Coca-Cola Company 9.4
6.- BYD Corporation Ltd 8.2
7.- Southwest Airlines 8.1
8.- Delta Airlines 7.4
9.- Bank of America 6.8
10.- US Bancop 6.3
11.- The Bank of New York Mellon
Corporation 5.3
12.- Apple 3.3
13.- General Motors Company 3.2
14.- The Goldman Sach Group 3
15.- Charter Communication, Inc 2.8

Due to the information on this report, I would recommend to my client to invest in these
companies because there are high opportunities to increase their value through time.
Berkshire Hathaway Inc pursuit is to have a balanced portfolio and include different
industries, however, I will suggest evaluating the current price because when this report
was published maybe some prices are already high and it is needed to estimate where
to buy them.

4. As a follow-up to question 3 above, what companies on the list should surprise

you, based on Buffett’s presentation in the video at the University of Georgia,
which you have studied for Part A? Do explain your answer. (4 marks)

From the portfolio I was surprised that he invested in the aeronautical industry,
companies like southwest airlines and delta, I remember that he was skeptical about the
profitability in this industry. Another company is apple; it is a tech company, and he did
not know about tech. I remember that he said, "I will not worry about Microsoft because
that company is outside of his circle of competence" and this is a reason to not buy a
share from Microsoft and I think it is the same with apple.

5. Refer to Warren Buffett’s discussion about “The Bet” at pages 11 to 14 of the

Letter to Shareholders for FY 2017. What exactly was “The Bet” that Buffett
placed? What was the outcome of “The Bet”? What lesson do you take away
from all of the discussion on “The Bet”? Please answer each of these three
questions in separate and numbered paragraphs. Be sure that your answers are
fully and clearly stated. (6 marks)

 Warren Buffett publicly offered to wager $500,000 that no investment pro could
select a set of at least five hedge funds –wildly-popular and high-fee investing
vehicles – that would over an extended period match the performance of an
unmanagedS&P-500 index fund charging only token fees.

 The compounded annual increase to date for the index fund is 7.1%, which is a
return that could easily prove typical for the stock market over time. The earnings
obtained by S&P 500 until 2017 represent 85.4%. Instead, Warren Buffet
operated in what I would call a “neutral” environment. In it, the five funds-of-funds
delivered, through 2016, an average of only 2.2%, compounded annually.

 I think many customers pay high fees to the hedge-fund managers for the
manage of their money. It is representing a good business for the managers
because they are who get the big part of money, they will receive money even if
there are losses in the investments. And it is a better idea to invest in an index
fund rather than in a hedge fund

6. Please review the fifteen business principles that inform the managerial
approach taken by Berkshire Hathaway Inc. at pages 18 to 21 of the 2017
Annual Report. Then, select the principles which you think are directly related to
the topics discussed in Chapters 6 and 8 of your textbook. Please state each of
the selected principles fully and in separate paragraphs and for each one, do
explain its connection to the specific topics discussed in Chapter 6 and/or
Chapter 8. Please ensure that there is a logical structure in the presentation of
your answer to this question. (8 marks)

 Our long-term economic goal (subject to some qualifications mentioned later) is

to maximize Berkshire’s average annual rate of gain in intrinsic business value
on a per-share basis. We do not measure the economic significance or
performance of Berkshire by its size; we measure by per-share progress. We are
certain that the rate of per-share progress will diminish in the future – a greatly
enlarged capital base will see to that. But we will be disappointed if our rate does
not exceed that of the average large American corporation. We can find this
 approach in the chapter 6 the Basis for Competitive Attack. Strategic offensives
should exploit the power of a company’s strongest competitive assets and
Berkshire Hathaway knows that they have a great performance.

 Despite our policy of candor, we will discuss our activities in marketable

securities only to the extent legally required. Good investment ideas are rare,
valuable and subject to competitive appropriation just as good product or
business acquisition ideas are. Therefore, we normally will not talk about our
investment ideas. This ban extends even to securities we have sold (because we
may purchase them again) and to stocks we are incorrectly rumored to be
buying. If we deny those reports but say “no comment” on other occasions, the
no-comments become confirmation. Berkshire Hathaway knows the importance
of be pioneers because that helps build a firm’s reputation and creates strong
brand loyalty, we can find this approach in the Chapter six, The Potential for
First-Mover Advantages

 A managerial “wish list” will not be filled at shareholder expense. We will not
diversify by purchasing entire businesses at control prices that ignore long-term
economic consequences to our shareholders. We will only do with your money
what we would do with our own, weighing fully the values you can obtain by
diversifying your own portfolios through direct purchases in the stock market. We
can find this approach in the chapter 8 where explain WHAT DOES CRAFTING
A DIVERSIFIC ATION STRATEGY ENTAIL? Establishing investment priorities
and steering corporate resources into the most attractive business units.

7. Prepare a tabulation showing the total revenues ($B), net earnings ($B), and
dividends paid ($) for Berkshire Hathaway Inc. for the fiscal years 2017, 2016,
2015, 2014, and 2013 in that order. (3 marks)

Year 2017 2016 2015 2014 2013

Revenues $ 242.137 $ 223.604 $ 210.943 $ 194.699 $ 182.412
Earnings $ 44.940 $ 24.074 $ 24.083 $ 19.872 $ 19.476
Dividends
$0 $0 $0 $0 $0
paid

Berskshire Hathaway Inc does not pay dividens.

8. State fully, clearly, accurately the four building blocks that add value to Berskshire
Hathaway Inc., as stated on the Letter to Shareholders. (2 marks)

(1) sizable stand-alone acquisitions.

(2) bolt-on acquisitions that fit with businesses we already own.
(3) internal sales growth and margin improvement at our many and varied businesses;
and
(4) investment earnings from our huge portfolio of stocks and bonds.

9. One of the fifteen business principles referred to in question 6 makes the claim
 that “We eat our own cooking.” State clearly and fully what exactly is the principle
in question and state also what do you think is its underlying rationale. (2 marks)

 “In line with Berkshire’s owner-orientation, most of our directors have a significant
portion of their net worth invested in the company. We eat our own cooking”. We
can find this statement in the second principle.

 I think Warren Buffet means that the company is based on their partners and not
only on investors. They are also involved with the company and invest their
wealth in the company. The responsibility and result are shared by all too.

10. Refer to the assigned reading, A Random Walk Down Wall Street, Chapter 1, which
has been uploaded on the platform in eCentennial. If you were to go back in time
and imagine that Burton Malkiel was a mentor to Warren Buffett and that Professor
Malkiel had insisted that Warren should take the message of the book very seriously
as he (Warren) contemplated his future career in investing, what do you think would
have been Warren’s response? Do present a full and clear response. (3 marks)

I think Warren Buffet would agree with the idea of passive investment and that be active
in managing the money would not allow him to beat the market indexes in the long-term
investment due to the fees to pay for the managers who be actively moving the money
in the market. However, in the last years the performance of Berkshire Hathaway Inc.
beat the S&P 500.

11. According to Burton Malkiel, the investment professionals have one of two
approaches to asset valuation: the firm-foundation theory or the castle-in-the-air
theory. Please present a clear exposition of the firm-foundation theory. (5 marks)

The firm-foundation theory is based on the intrinsic value, it postulates that financial
assets like stocks or real state has an intrinsic value and the idea of this theory is
estimate the intrinsic value of the asset and compare with the current value in the
market, if the value in the market is below the intrinsic value could offers the a
opportunity of buy and when the value is too high compared with to the intrinsic value;
the investor can sell.