Comments on: Warren Buffett’s BNI Intrinsic Value Calculation

By: Investing Book Review: Why are we so clueless about the stock market | Old School Value

Wed, 18 Nov 2009 03:54:46 +0000

[...] affects the market, why investing in IPO’s is a bad idea and offers 4 good case studies of Burlington Northern Santa Fe (BNI), Thor Industries (THOR), Wells Fargo (WFC) and Moody’s (MCO). Personal [...]

By: Tyler

Tyler — Mon, 09 Nov 2009 05:15:24 +0000

Hi Jae,

I Really encourage you to take a look at Telstra on the ASX. I Bought some recently.
DCF = $5 with a discount rate of 11%

By: Dividend Tree Potpourri – November 8, 2009 | Dividend Tree

Dividend Tree Potpourri – November 8, 2009 | Dividend Tree — Sun, 08 Nov 2009 13:56:23 +0000

[...] Warren Buffett’s BNI intrinsic value calculation [...]

By: Weekly Links: November 8, 2009 | Dividends Value

Weekly Links: November 8, 2009 | Dividends Value — Sun, 08 Nov 2009 10:32:41 +0000

[...] Old School Value presented Warren Buffett’s BNI Intrinsic Value Calculation [...]

By: Jae Jun

Jae Jun — Sun, 08 Nov 2009 05:35:42 +0000

Hi Luis,
It’s been a while. Good point about the last paragraph. I don’t think I make sense at all. It was around 2am and I just wasn’t thinking straight. lol.

Sivaram,
It’s interesting to try and dissect his motives for the purchase but in the end, we’ll have to see whether it was worth it. Buffett could be making a macro call but time will tell.

By: Sivaram Velauthapillai

Sivaram Velauthapillai — Sat, 07 Nov 2009 17:46:48 +0000

Unless one expects sales (or profits) to grow at the rate it has in the last 5 years–highly questionable IMO–I don’t see why Buffett picked Burlington Northern Santa Fe. As you point out, it is traditionally a high capex industry with low returns on equity.

I’m not really arguing Warren Buffett overpaid for BNSF but why tie up $40 billion (total, including currently owned stake) in such a business?

An interesting thing to note is that this is a leveraged buyout. I’m not an expert on Buffett’s investment or Berkshire Hathaway but htis might be his first major buyout involving large amounts of debt (around $8 billion.) Buffett is financing around half of the stake with debt. I wonder if this may be a factor in the buyout. I wonder if he is boosting his return through financial leverage. The debt under consideration apparently has 3 year term so it’s not really long-term leverage but I wonder if Berkshire will re-finance in 3 years and maintain the debt level. If Berkshire maintains the debt level, returns to shareholders will be boosted slightly.

In any case, I, as well as most observers, are clearly missing the core reason for this purchase. It’s like his Coca-Cola purchase which turned out to be great but no one understood it at the time.
Sivaram Velauthapillai´s last blog ..Articles for a Friday

By: Jim

Jim — Fri, 06 Nov 2009 22:01:15 +0000

Good article Jae.
Jim´s last blog ..Gannett Co., Inc. – Undervalued

By: Luis

Luis — Fri, 06 Nov 2009 14:17:56 +0000

Been following your work for a while and think you are doing a great job!

I wanted to make a quick comment on your last paragraph. The concept of margin of safety implies that there is room to be wrong. If you pay a fair price (no discount) or a premium by definition you have no margin of error. That does not mean that your purchase will not work out, just that there is no margin for error.

If Buffett paid full price or a premium for the assets, he has no margin of safety on the valuation. I would say his only margin of safety is his and his managers talent/skills at running successful companies.