The information that is really needed, whether it is generally accepted, non-generally accepted or non-generally accepted, can help users of financial statements understand three questions:
1) How much is this company worth?
2) How likely is it to reach its future goals?
3) How well do managers perform under the existing conditions?
In most cases, simple financial numbers don't answer these questions, and it's hard for the business community to use a simple set of rules to effectively explain the economic substance of a company, especially for a group like Berkshire, which is made up of many different industries.
Warren Buffett believes that whenever it is easier for investors to find investment opportunities that have been lost in the past, the opportunity cannot be lost, and the time will not come again. He believes that at this time, it is easier to find investment opportunities by honestly reading the financial annual reports of various companies.
In a letter to shareholders in Berkshire's 1988 annual report, Warren Buffett said that financial annual reports, whether prepared in accordance with GAAP, non-GAAP or any other system, will help investors understand three questions:
First, how much intrinsic value is this company?
Second, will the company be able to meet the profit return requirements of investors in the future? Third, compared with other peers, is the performance of the company's management excellent?
Warren Buffett believes that although investors will not be able to find the above answers from simple financial data in most cases, in any case, it is very important to read the financial annual report, and investors are likely to find investment opportunities in it.
One example is the severe recession on the West Coast of the United States in the early 1990s, when many banks in California had liquidity difficulties because loan funds were tied up with residential mortgages. Among these banks, the bank with the largest commercial real estate ownership was the Bank of Wales-Fargo, which had the weakest move of all bank stocks, starting sharply** at $86 per share, and there was a panic selling.
At this time, Buffett picked up his old tradition again and immediately turned over the financial statements of the Bank of Wales-Fargo. He didn't care about it and came to the opposite conclusion of other investors.
It turns out that Buffett bought a large number of ** from the National Bank of Illinois and the Trust Company between 1969 and 1979, so he is no stranger to bank stocks. In particular, it is worth mentioning that during the above-mentioned period, Buffett heard a secret from the president of this bank that judging whether a bank is operating well mainly depends on whether the loans issued by the bank are risky, and this can be seen from the increase or decrease of the bank's operating costs, whether it often lends the wrong money, and whether there are bad debt losses.
Warren Buffett conducted a study of the financial statements of the Bank of Wells and found that the bank has been in the bank since Carl? Since Richard became president in 1983, his business performance has been good, not only with earnings growth and return on assets higher than the average of his peers, but also with the highest operational efficiency in the entire United States, and a very solid and risk-free lending business. Warren Buffett thus concludes that although this bank.
The ratio of commercial real estate is the highest among its peers, but the risk of loss from these real estate loans is negligible, in stark contrast to the financial panic risk that exists in the banking sector as a whole.
Warren Buffett calculated that the bank's annual pre-tax income at that time still exceeded $1 billion, even after deducting loan losses of $300 million; At the same time, even if the worst-case scenario is estimated, that is, a 10% loss of all $48 billion in loans, including commercial real estate, is only equivalent to 30% of the bank's principal, and it is still possible to avoid a loss!
So, when the Bank of Wells Fargo *** 50%, Buffett invested 2$8.7 billion to buy a 10% stake in the bank, making it the bank's largest shareholder. As it turned out, Warren Buffett was absolutely right in this investment decision.
Warren Buffett believes that investors can help identify investment opportunities by reading financial reports. Of course, reading an annual report is not an easy task, in addition to mastering accounting knowledge, you must also understand the characteristics of the industry.
In special cases, it is necessary to be good at identifying accounting fraud and not to be deceived.