Warren Buffet: Man of Principle

Warren Buffet is a man of principle. He does not believe in risk. He avoids it by using a set of investment guidelines that help him make the best decisions. He minimizes his potential for risk by using a discount rate that is based on the 30 year US Treasury when trying to determine the success or potential failure of a Berkshire Hathaway investment. In 1995, Warren Buffet used a 6.86% 30 year Treasury bond to calculate his risk NPV of his initial investment in GEICO. See the tables below:

Cash Discount NPV

Year 0 1995 purchase -$2,300.00 1 -$2,300.00

Year 1 1996 dividend $1.16 $39.06 0.94 $36.72

Year 2 1997 dividend $1.25 $42.09 0.88 $37.04

Year 3 1998 dividend $1.34 $45.12 0.82 $37.00

Year 4 1999 dividend $1.44 $48.48 0.77 $37.33

Year 5 2000 dividend $1.55 $52.19 0.72 $37.58

Year 5 2000 share $90 $3,030.00 0.72 $2,181.60

NPV $59.67

By returning a positive NPV of $59.67, a difference of $3 over the original asking price of $55 for the GEICO stock, this automatically convinced Mr. Buffet that GEICO was positioned as an ideal candidate for ownership by Berkshire Hathaway Investment.

Year 0 1995 purchase -2300 1 -2300

Year 1 1996 dividend $1.16 39.06 0.94 36.7164

Year 2 1997 dividend $1.34 45.12 0.88 39.7056

Year 3 1998 dividend $1.55 52.19 0.82 42.7958

Year 4 1999 dividend $1.79 60.27 0.77 46.4079

Year 5 2000 dividend $2.07 69.7 0.72 50.184

Year 5 2000 share $125 4209 0.72 3030.48

NPV 936.47

But to make sure that his calculations were correct we would have to assume that eventually the stock would rise to $125 per share thereby giving a NPV of $936.47. Either way this investment strategy proved beneficial for shareholders. Since 1995 GEICO has continued to amaze shareholders by paying average an annual return