Buffet Case

Warren Buffet, whose estimated net worth is approximately $44 billion, is one of the richest individuals in the world. He is very respected for his business style. As CEO of Berkshire Hathaway Inc., he makes only $100,000 per year in salary. And while he and other insiders control 41.8% of the company, he believes in running the company based on the interest of ALL of its shareholders.

Buffet has been known to rebuke business schools saying their finance and investing theories were irrelevant. However, he credits his mentor from Columbia University, Professor Benjamin Graham, for his success. Graham developed a philosophy on value-based investing as co-author of Security Analysis. "This became the cornerstone of modern value investing. Grahams approach was to focus on the value of assets, such as cash, networking capital and physical assets." (Bruner) Buffet took Graham's method of identifying undervalued stocks and modified it to pinpoint valuable franchises unrecognized by the market.

Berkshire Hathaway Inc. is described as "a holding company owning subsidiaries engaged in a number of diverse business activities" in its 2004 annual report. Berkshire began as a cotton manufacturing company in 1889 and grew to become one of the largest textile companies. It merged with Hathaway Manufacturing in 1955. It began to decline to inflation and technological changes. Buffet and a group of investors procured the company in 1965. Its portfolio now consists of businesses in insurance, apparel building products, finance and financial products, flight services, retail, grocery distribution, carpet and floor coverings, and a selection of smaller businesses.

Among its subsidiaries is MidAmerican Energy Holdings Company. When investing in the company in 2000, Buffet expressed that they had great interest in energy companies. Due to regulations, Berkshire had to arrange the investment where it would not have voting control over MidAmerican. From 2000 to 2005, Berkshire had trouble identifying further attractive acquisitions. But in 2005, Buffet announced that MidAmerican would purchase the electric utility, PacifiCorp. PacifiCorp was the big thing they were looking for. Based in Oregon, it was a leading low-cost energy producer that served 1.6 million customers in six states. By holding to his philosophy, this acquisition demonstrated Buffet's continued success in investing.

Berkshire Hathaway's annual report includes a chairperson's letter by Buffet where he has explained his philosophy in depth. In his letters, he emphasizes the following:

* Economic reality, not accounting reality. He explains that cash flow is a better measurement than the GAAP results.

* Cost of the lost opportunity. He examines the options as either/or decisions instead of yes/no decisions, which means he compares the attractiveness to other