Warren Buffet: Man of Principle
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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:
Discount
Year 0
1995 purchase
-$2,300.00
-$2,300.00
Year 1
1996 dividend $1.16
$39.06
$36.72
Year 2
1997 dividend $1.25
$42.09
$37.04
Year 3
1998 dividend $1.34
$45.12
$37.00
Year 4
1999 dividend $1.44
$48.48
$37.33
Year 5
2000 dividend $1.55
$52.19
$37.58
Year 5
2000 share $90
$3,030.00
$2,181.60
$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
-2300
Year 1
1996 dividend $1.16
39.06
36.7164
Year 2
1997 dividend $1.34
45.12
39.7056
Year 3
1998 dividend $1.55
52.19
42.7958
Year 4
1999 dividend $1.79
60.27
46.4079
Year 5
2000 dividend $2.07
50.184
Year 5
2000 share $125
3030.48
936.47
But to make sure that his calculations were correct