The Warren Buffett Way: The World’s Greatest Investor

230 NOTES

Chapter 7 Investing Guidelines: Financial Tenets

1. Berkshire Letters to Shareholders, 1977–1983, 43.


2. Berkshire Hathaway Annual Report, 1987.


3. “Strategy for the 1980s,” The Coca-Cola Company.


4. Berkshire Hathaway Annual Report, 1984, 15.


5. Berkshire Hathaway Annual Report, 1986, 25.


6. Carol J. Loomis, “The Inside Story of Warren Buffett,” Fortune(April 11,
   1988), 34.


7. Berkshire Hathaway Annual Report, 1990, 16.


8. Chalmers M. Roberts, The Washington Post: The First 100 Years( Boston:
   Houghton Miff lin, 1977), 449.


9. Ibid., 426.


10. Berkshire Hathaway Annual Report, 2002, quoted in Andrew Kilpatrick,
    Of Permanent Value: The Story of Warren Buffett( Birmingham, AL:
    AKPE, 2004), 1361.

Chapter 8 Investing Guidelines: Value Tenets

1. Berkshire Hathaway annual meeting, 2003, quoted in Kilpatrick, Of Per-
   manent Value(2004), 1362.


2. Berkshire Hathaway Annual Report, 1989, 5.


3. Berkshire Hathaway annual meeting, 1988, quoted in Kilpatrick, Of Per-
   manent Value(2004), 1330.


4. Jim Rasmussen, “Buffett Talks Strategy with Students,”Omaha World-
   Herald( January 2, 1994), 26.
   5.The f irst stage applies 15 percent annual growth for ten years, starting in
   1988. In year one, 1988, owner earnings were $828 million; by year ten,
   they will be $4.349 billion. Starting with year eleven, growth will slow to 5
   percent per year, the second stage. In year eleven, owner earnings will equal
   $3.516 billion ($3.349 billion ×5 percent+$3.349 billion). Now, we can
   subtract this 5 percent growth rate from the risk-free rate of return (9 per-
   cent) and reach a capitalization rate of 4 percent. The discounted value of a
   company with $3.516 billion in owner earnings capitalized at 4 percent is
   $87.9 billion. Since this value, $87.9 billion, is the discounted value of Coca-
   Cola’s owner earnings in year eleven, we next have to discount this future
   value by the discount factor at the end of year ten [1/(1+.09)10]=.4224. The
   present value of the residual value of Coca-Cola in year ten is $37.129 bil-
   lion. The value of Coca-Cola then equals its residual value ($37.129 billion)
   plus the sum of the present value of cash f lows during this period ($11.248
   billion), for a total of $48.377 billion.