-4-
UVA-F-1483
depreciation, and assets for Berkshire’s various business segments. The company’s investment
portfolio also included equity interests in numerous publicly traded companies, which are
summarized in
Exhibit 3
. In addition, the company owned about $21.4 billion of foreign exchange
contracts at year end, spread among 12 currencies. Prior to March 2002, neither Buffett nor
Berkshire had ever traded in currencies, but Buffett had developed serious concerns about the United
States’ large current account deficits, and he hoped that his currency bets would offset the growing
pressure on the dollar.
Buffett’s Investment Philosophy
Warren Buffett was first exposed to formal training in investing at Columbia University
where he studied under Professor Benjamin Graham. A coauthor of the classic text
Security
Analysis
, Graham developed a method of identifying undervalued stocks (that is to say, stocks
whose prices were less than their intrinsic value). This became the cornerstone of modern value
investing. Graham’s approach was to focus on the value of assets, such as cash, net working capital,
and physical assets. Eventually, Buffett modified that approach to focus also on valuable franchises
that were unrecognized by the market.
Over the years, Buffett had expounded his philosophy of investing in his chairperson’s letter
to the shareholders in Berkshire Hathaway’s annual report. By 2005, those lengthy letters had
accumulated a broad following because of their wisdom and their humorous, self-deprecating tone.
The letters emphasized the following elements:
1.
Economic reality, not accounting reality
. Financial statements prepared by accountants
conformed to rules that might not adequately represent the
economic
reality of a business.
Buffett wrote:
…because of the limitations of conventional accounting, consolidated reported
earnings may reveal relatively little about our true economic performance.
Charlie [Munger, Buffett’s business partner] and I, both as owners and managers,
virtually ignore such consolidated numbers.… Accounting consequences do not
influence our operating or capital-allocation process.
9
Accounting reality was conservative, backward-looking, and governed by generally accepted
accounting principles (GAAP). Investment decisions, on the other hand, should be based on
the economic reality of a business. In economic reality, intangible assets, such as patents,
trademarks, special managerial expertise, and reputation might be very valuable, yet under
-4-
UVA-F-1483
depreciation, and assets for Berkshire’s various business segments. The company’s investment
portfolio also included equity interests in numerous publicly traded companies, which are
summarized in
Exhibit 3
. In addition, the company owned about $21.4 billion of foreign exchange
contracts at year end, spread among 12 currencies. Prior to March 2002, neither Buffett nor
Berkshire had ever traded in currencies, but Buffett had developed serious concerns about the United
States’ large current account deficits, and he hoped that his currency bets would offset the growing
pressure on the dollar.
Buffett’s Investment Philosophy
Warren Buffett was first exposed to formal training in investing at Columbia University
where he studied under Professor Benjamin Graham. A coauthor of the classic text
Security
Analysis
, Graham developed a method of identifying undervalued stocks (that is to say, stocks
whose prices were less than their intrinsic value). This became the cornerstone of modern value
investing. Graham’s approach was to focus on the value of assets, such as cash, net working capital,
and physical assets. Eventually, Buffett modified that approach to focus also on valuable franchises
that were unrecognized by the market.
Over the years, Buffett had expounded his philosophy of investing in his chairperson’s letter
to the shareholders in Berkshire Hathaway’s annual report. By 2005, those lengthy letters had
accumulated a broad following because of their wisdom and their humorous, self-deprecating tone.
The letters emphasized the following elements:
1.
Economic reality, not accounting reality
. Financial statements prepared by accountants
conformed to rules that might not adequately represent the
economic
reality of a business.
Buffett wrote:
…because of the limitations of conventional accounting, consolidated reported
earnings may reveal relatively little about our true economic performance.
Charlie [Munger, Buffett’s business partner] and I, both as owners and managers,
virtually ignore such consolidated numbers.… Accounting consequences do not
influence our operating or capital-allocation process.
9
Accounting reality was conservative, backward-looking, and governed by generally accepted
accounting principles (GAAP). Investment decisions, on the other hand, should be based on
the economic reality of a business. In economic reality, intangible assets, such as patents,
trademarks, special managerial expertise, and reputation might be very valuable, yet under
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