A sample of business studies paper: Analysis of Warren Buffet’s Shareholder Letter of 1982

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One of the most popular fields of study across the globe is business studies. While pursuing this field of specialization you will be required to write assignments as part of your coursework. Below is a sample of a business studies paper that can guide you in writing your own paper.

Introduction of a sample of business studies paper

            Warren Edward Buffet is among the renowned American entrepreneur, investor, and philanthropist. His business acumen is recognized globally and he is categorized as one of the wealthiest people in the globe. This paper analyses Warren Buffet’s letter that was addressed to the shareholders of Berkshire Hathaway Inc in 1982. The paper specifically focuses on the structure of the letter, investment portfolio selection, fund manager-investor relationship, financial statements, and the company’s investment philosophy.

Analysis of the General Structure of the Letter

            The letter is structured into several sections including the opening section which presents details the earnings for 1982 fiscal year. In this section, Warren Buffet informed the shareholders that the earnings for the year had declined and further indicates the key reasons for the decline. However, this section goes directly to the key details of the earning. Buffet should have used the opening paragraph to create a rapport with the shareholders (Nistorescu, 107). This could have been achieved through a number of such as informing that the company did well or even through the use of an amusing statement. The second section focuses on the non-reported ownership earnings. Notably, the segment presents the shareholders with information on the earnings in which the firm had at least 20% ownership. The third section makes the shareholder aware of the company’s long-term corporate performance. Notably, this includes the firm’s net worth, the annual growth in book value, and the company’s long-term goal.

The fourth section presents information on the sources of the reported earnings. Noticeably, the earnings are presented in the form of a table indicating the companies in which Berkshire held shares and the individual earnings from each company. Additionally, the earnings are also compared with 1981 earnings. The fifth section presents an overview of the conditions of the insurance industry in 1982. Here, Warren Buffet warns the shareholders that the market conditions could deteriorate; thereby, affecting the firm negatively. The sixth section informs the shareholder about an impending merger between the company and a firm known as Blue chip. Additionally, the shareholders are informed that an identical valuation method would be applied during the merger. The final section is the miscellaneous segment which informs the shareholders about the company’s acquisition program.

Commentary on Warren Buffet’s Investment Portfolio Selection

            A firm’s financial policy and the strategic mix of securities is influenced by the consideration of the shareholders interest. Companies modify their asset-acquisition behaviors to ensure that they achieve profitability (Salawu, 122). In my opinion, the company’s investment portfolio selection was sound. Evidently, the firm has invested in corporations that were making profits. The investment manifests in the form of partial ownership of corporations such as GEICO, Buffalo Evening News, Blue Chips Stamps, and Precision Steel among others. For example, the company’s Berkshire-Waumbec Textiles shares earned $ 1.493 000 million after tax. The earnings from Wesco Financial amounted to $1.59 million after tax. The total earnings from all the firms amounted to $62.604 million. This demonstrates that the investment portfolio was giving the company good returns.

In his letter, Warren Buffet noted that some of the corporations that the company had invested in such as Buffalo News were doing really well and the circulation of its Sunday news edition had grown exponentially by 35%. According to Jagongo and Mutswenje (92), investors such as Warren Buffet are wealth-maximizers who follow the fundamental rules of risk-return consideration. As such, investors consider a number of factors before buying stock in a firm. These factors include the past performance of a company’s stock, stock marketability, the ability of a company to achieve long-term growth, and a firm’s financial capability. Salawu (122) also noted that investors’ decisions are also influenced by size of the firm, asset tangibility, profitability, and research and development intensity. Consequently, it is evident that Warren Buffet had chosen to invest in firms which were profitable.  However, Warren Buffet acknowledged that the enlarging commitment of the company’s resources in these firms was one of the key reasons for the drop in operating earnings since a large section of the pro-rata share earnings was excluded from the financial report. Nevertheless, this is not a big concern since the investments were long-term and the company would continue to earn annual dividends from the partial ownership.

Warren Buffet’s acumen in choosing an investment portfolio is evident from the rationalization that was adopted by the company’s stock-issuing management. The managers emphasized that the company that they were purchasing should be worth more in the future. This emphasizes the concept of profitability. Additionally, the managers focused on the growth of Berkshire Hathaway Inc. This growth would be obtained from the companies that the firm bought. Consequently, the company could only invest in corporations that were growing. Besides, the company’s acquisition program focused on firms that portrayed consistent earning power and corporations that were earning good returns on equity while having minimal debt. The precaution adopted by Berkshire Hathaway Inc while making investment decisions is also evident from the merger whereby the firm seeks for fairness to shareholders from both companies by ensuring that each party receives as much as it gives. Mergers and acquisitions enable companies to grow externally through asset concentration. They are perceived as an external growth strategy for expanding product portfolios. Besides, mergers are perceived as one of the strategic means of expanding shareholders value (Gupta, 61). Companies also use the mergers and acquisitions strategy as way of diversifying or consolidating their investment portfolios.

Criticism of Buffet’s Shortcomings in the Shareholder Letter

One of the key shortcomings in the letter is that it does not convey a cordial relationship with the shareholders. For example, in the opening paragraph the Warren Buffet goes right into the technical details of the business rather than first greeting the shareholders. Notably, he should have used the opening paragraph to create a rapport with the shareholders. According to Nistorescu (107), it is important to catch the attention of the audience and establish a rapport with them in the initial minutes of the interaction. The researcher argues that a presentation should be started in a positive note such as an amusing statement or a powerful affirmation that is related to the topic of discussion. This would not only catch the audience’s attention, but also motivate them to pay keen attention to the letter. Nevertheless, it is important to acknowledge that Warren Buffet uses amusing statements within the body of the letter. However, such statements would have also worked well within the opening paragraph of the letter.

Commentary on the Financial Statements in the Letter

 Financial reporting is very crucial since it not only ensures transparency to the shareholders but also informs about the risk that a company is exposed to and the firm’s financial performance (Mironiuc, Carp, & Chersan, 405). In the letter, the financial statements and tables serve the purpose of informing the shareholders about the earning of Berkshire Hathaway Inc. For example, the first table indicates the firm’s reported earnings. The table also compares the earnings for the 1981 fiscal year with those of 1982. This enables the shareholders to analyze the performance of the firm in 1982 in relation to that of the preceding year. The table also indicates the reported earnings of the companies which Berkshire Hathaway Inc owned. Besides, the table informs the shareholder about the earnings from sales of securities and unusual assets.

The second table informs the shareholder about the company’s dividend earnings from uncontrolled businesses. The table indicates that the company common stock holdings in different firms were worth $9.45 million. This included the shares owned by the firm or its insurance subsidiaries and those owned by Blue Chip and Wesco. On the other hand, the third table presents an overview of the insurance industry statistics. This gives the shareholders an idea of how the industry in general performed. Reporting such statistics enable investors to understand the performance of the firm relative to that of the industry. Such statistics also indicate what is happening in an industry and the impacts of the firm (Grace & Ambrose, 148).

Relationship between a Successful Fund Manager and His Invested Companies

            The performance of a fund manager is influenced by his personal characteristics such as superior managerial decision making, experience, education, fees and performance, and professional qualification (Arif & Jawaid, 3). Besides, a successful fund manager maintains a quality working relationship with the firms that he invests in. From the letter, it is evident that Warren Buffet maintained a quality and cordial relationship with the managers of the firms in which he had invested. He also commends the managers for the superior performance of the companies. For example, he commends Henry Urban, Murray Light, and Stan Lipsey among other key managers at Buffalo for the expansion in the newspaper’s Sunday readership. He also commends Jack Byrne the manager at GEICO for the increase in the firm’s market price.

Warren Buffet’s Investment Philosophy

            Warren Buffet’s investment philosophy is informed by various tenets such as investing in stocks that have potential but are undervalued by the market, firms which do not have excess debt, consistence in a company’s profit margin, his understanding of a firm, and a company’s competitive advantage. Buffet also invests in companies whose intrinsic value is 25% above their current market capitalization (Radcliffe). This philosophy is evident in the miscellaneous section of the letter where Warren Buffet informs the shareholders that the firm’s acquisition program focuses on firms with firms which have indicated consistency in earning power, firms which have minimal or no debt, and simple businesses which are easy to understand.

Conclusion

A shareholders letter is an important tool of communicating to the investors of a company. The letter documents a preview of the company’s earning in comparison with the preceding financial year. Besides, the letter presents shareholders with insights into the performance of the industry in general and informs them about the companies which are doing well within their investment portfolio. This is achieved through the use of financial statements and tables. On the same note, the letter communicates the company’s investment philosophy which provides investors with insights on the tenets that are emphasized in a firm and the means through which value is created in the company.

 

 

 

Works Cited

Arif, Imtiaz, and Tehseen Jawaid. “Effect of fund managers’ characteristics on mutual funds performance and fee in emerging market of Pakistan.” Global Management Journal for Academics and Corporate Studies, 1.1 (2011): 40-45.

Grace, Kariuki, and A. O. Jagongo. “Institutional investors’ perceptions on quality of financial reporting in Kenya.” International Journal of Humanities and Social Science, 3.21 (2013): 144-156.

Gupta, Pradeep Kumar. “Mergers and acquisitions (M&A): The strategic concepts for the Nuptials of corporate sector.” Innovative Journal of Business and Management, 1.4 (2012): 60-68.

Radcliffe Brent, “How does Warren Buffett choose the companies he buys?”. Investopedia, 26 July 2016. http://www.investopedia.com/ask/answers/081114/how-does-warren-buffett-choose-what-companies-buy.asp. Accessed 29 August 2016.

Jagongo, A. O., and Vincent S. Mutswenje. “A survey of the factors influencing investment decisions: the case of individual investors at the NSE.” International Journal of Humanities and Social Science, 3.4 (2014): 92-102.

Mironiuc, Marilena, Mihai Carp, and Ionela-Corina Chersan. “The relevance of financial reporting on the performance of quoted Romanian companies in the context of adopting the IFRS.” Procedia Economics and Finance, 20 (2015): 404-413.

Nistorescu, Alina. “The importance of audience in successful professional oral communication.” Journal “Annals – Economy Series, 80.16 (2013): 103-112.

Salawu, Rafiu Oyesola. “The effect of capital structure on profitability: An empirical analysis of listed firms in Nigeria.” International Journal of Business and Finance Research, 3.2 (2009): 121-129.

 

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