Premium Essay

Solution to Case Stury - Warren Buffett

In: Business and Management

Submitted By chencarl
Words 1340
Pages 6
Assessment of the eight major elements of Buffet's investment philosophy:

1 Economic reality, not accounting reality.


One tends to agree with Buffett on this philosophy.
Accounting is a product of many estimates and judgments. It is essentially a rear-view mirror, looking back at what has happened. To add to the problem the view changes with each new accounting period.
In contrast the economic reality is the view through the windshield at what lies ahead. It consists of intellectual property, creativity, know-how and the network of production and distribution systems. The brands and trademarks of a business are the symbols of the economic reality – symbols that indicate the reputation of the company. The economic reality changes much more slowly than the accounting reality as it is dependent on the response of the markets to new products and services that the company has to offer or to any substantive changes - up or down - in corporate reputation.

2. The cost of the lost opportunity.


Here Buffett is building on the economic principle of the efficient use of scarce resources where the notion of opportunity cost plays a crucial part in ensuring that resources are being used efficiently. The true cost of an investment is what you give up (opportunity) to get it. This includes not only the money spent in buying that asset but also the economic benefits that one has to do without because one bought that particular asset and thus can no longer buy something else with that money.

3. Value creation: time is money.


One agrees with Buffett on this philosophy. This philosophy is the positive Net Present Value(NPV) rule in finance. NPV of an asset or investment is the present value of its cash flows less the cost of acquiring the asset. Smart investors will only acquire assets that have positive NPVs and…...

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