Matt OlbrantzENGM 55502/08/2011Interim Assignment #2-Case Study; Warren Buffett

It was apparent at a young age that Buffett was destined for success. His parents, grandparents knew he was a giftedas a child and eventually would turn into something great. He had something that no one else had, a savvy for businessethics and profit. It is incredible to me that by the time Buffett finished high school he had $6,000 in savings. And evenmore incredible to have almost $10,000 by the time he got out of college. Buffett took what he learned as a young boyabout selling everyday items like gum and used the same philosophy in making billions in the stock market.

As a young boy shades of brilliance were apparent, selling lemonade, bubble gum, then the purchase of pin ball machinesfor use in barber shops and then selling them for a profit. Buffett began trading stocks at a young age with success. It wasobvious Buffett knew what he was doing as an adolescent and I think this set the foundation’s for his strategies later in life. It also shows that he would not invest something he was not familiar with. Who is not familiar with gum, lemonade and pin

ball as a kid??

Warren Buffett was first exposed to formal training in investing at Columbia University, where Buffett studied under Prof.Ben Graham. Graham developed a method that identified undervalued stocks and this was Buffett’s cornerstone approachof what is now called “valued investing”. From 1962 up through the 80’s Buffett really made his mark on the financialinstitutions across the US. In 1965 Buffett took a risk with Berkshire Hathaway, at first did not pan out but in 1967 with thepurchase of stocks in two separate companies it showed how Buffett’s patience has paid off. In 1970 when he becameCEO of Berkshire, this was the mark that changed investing for everyone in the US for the next 40 years. A strugglingtextile company in the mid 30’s and 40’s would eventually become a billion dollar conglomerate with no one but Buffett toattribute this feat too.

Buffett’s investment strategies are nothing short of brilliant. They are taught in colleges all over the US, and the world. Thousands of business owners have tried to mimic his leadership attributes with few being successful. As simple as theyseem on paper the ability to fulfill his strategies is near impossible. Many books, articles and interviews have beendocumented about Buffett with little success. The 4 tenets of business are why Buffett has been so successful. Looking ateach tenet really shows how brilliant yet simple the strategies are that he follows.

Business: Is the business easy to understand and have a consistent operating history? These go hand in hand. If youdon’t understand something, you either get to know it, or you stay away from it. In Buffett’s case he would study things healready knew that would make him even more knowledgeable about an investment. Also, if a company has changedproducts over the years the leaders may be lacking in some areas or the company does not have a good market niche.Buffett thoroughly researched every investment to make sure that it was the wisest decision at the time for him and hisemployees.

Management: This plays into the business aspect as mentioned above. Are the managers capable? Are the mangerscandid with shareholders? I think in other words, this is saying; are they crooks and compensating everyone accordingly. Buffett is not only a genius at what he does but he is also fair in his business practices. I also think the last management tenet“does the management resist the institutional imperative”, basically saying, does this company follow the rules. Buffettalways played by the rules when investing, which makes him even more amazing. Most CEO’s have an inside “tip” or usedillegal practices to get where they are. With Buffet, it was nothing but.

Financial: One of the more important factors, which I do not entirely understand. It seems with Buffett’s rationale tofocus on companies with high profit margins that indeed paid off. This out of all the “tenets” may be the most important and

influential. I think all the financial tenets work in the long term. Patience was one of Buffett’s strongest qualities and all ofthese tenets take patience to be successful. For every dollar retained, make sure the company has created at least onedollar in market value. Buffett is not satisfied with just the minimum. I think that one for one is not good in his eyes. Hewanted, and has seen huge returns on every dollar he has retained in every company he has owned.

Market: Buffett’s know how of how market trends and how they relate to business were genius. He understood that thevalue of the business or investment, whether low or high, Buffett had a knack of purchasing it for significantly less than it wasworth. He would research sometimes for months, but sometimes it only took him hours to make a multi-million dollardecision.

Buffet to me is the greatest investor that has ever lived. It is funny to me that for every case study I have completed, nomatter how great the investor, inventor who ever it may be, there is always room for error. At the end of this case study thewriter tries to say that “some analysts felt that his approach to investing was too conservative”. This is absurd; Buffett dideverything right for 50 years (minus the five where he didn’t really make money). This is just another reason why he is worth$62 billion.

One of the most admirable things about Warren Buffett, despite all his wealth and success, is how he is against employeestock options and high CEO compensation packages in the tech. companies. Which, I have read in many different places, isone of the main reason why he did not invest in a single one. This just shows you how down to earth his thinking really is andhow fair of business man he is with his employees.

Conventional thinking would hold that it would be near impossible for Buffett to maintain his record of 28% annualgrowth in shareholder wealth. I read an article where Buffett stated “a fat wallet is the enemy of superior investment results”. Buffett departed from conventional thinking, by using the rate of return on the long-term U.S. Treasury bond to discountcash flows. Defending this practice, Buffett argued that he avoided risk, and therefore should use a ‘risk-free’ discount rate

Warren Buffet has affected many people, mainly is a positive way. Being from an all American city like Omaha,Nebraska, growing up not having more than the simple everyday items and growing up to be the most successful investor inthe history of the US. It gives everyday people the idea that no matter what race you may be where you are from or whatyou believe in, that anyone can succeed and succeed well. Buffett wasn’t handed a family owned business or the heir of alarge sum of money. He started his business with a lemonade stand when he was 5 years old and never looked back. Formost of his life Buffett has been an influence, but I think if you asked him he would be the one who was influenced by othergreats such as Philip Fisher and Ben Graham.