Question
Consider the following elements of Warren Buffetts investment philosophy (copied after the question). Which of these element(s) is (are) consistent with modern finance principles based
Consider the following elements of Warren Buffetts investment philosophy (copied after the question). Which of these element(s) is (are) consistent with modern finance principles based on the finance courses you have taken?
a. Economic reality, not accounting reality
b. The cost of lost opportunity
c. Embrace the time value of money
d. Measure performance by gain in intrinsic value, not accounting profit
- a), and b) only
- c) and d) only
- a), b), and c) only
- a), c), and d) only
- a), b), c), and d)
Buffet's Investment philosophies are as follows:
1. Economic reality, not accounting reality. Financial statements prepared by accountants conformed to rules that might not adequately represent the economic reality of a business.
2. The cost of the lost opportunity. Buffett compared an investment opportunity against the next-best alternative, the lost opportunity. In his business decisions, he demonstrated a tendency to frame his choices as either/or decisions rather than yes/no decisions. Thus an important standard of comparison in testing the attractiveness of an acquisition was the potential rate of return from investing in the common stocks of other companies. Buffett held that there was no fundamental difference between buying a business outright and buying a few shares of that business in the equity market. Thus for him, the comparison of an investment against other returns available in the market was an important benchmark of performance.
3. Embrace the time value of money.
4. Measure performance by gain in intrinsic value, not accounting profit.
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