Summary
Warren Buffet purchases undervalued stocks and looks at the assets of the company. Berkshire Hathaway is looking at large used car market potential.
Analysis
Warren Buffet looks at the value and the assets of a company before purchasing. He purchases undervalued companies, and also weighs the assets to liabilities of the company. Purchasing undervalued stocks is an important concept, but it is not enough. There is no law that says an undervalued company will increase in value. One of his secrets is to only purchase companies that have greater current assets than current liabilities. He is looking for value and financial stability in the company, an undervalued company must have the ability to increase in price, or it may continue to decline in price. This is why current assets must be greater than current liabilities, among other things.
The used car business is interesting. With 86 used car dealerships in 39 states he sees the value in used cars. In the present market, oil, gas, and energy prices are increasing, and expected to go higher. New car are greatly overpriced, and most consumers can expect to lose the entire purchase price of a new car. With consumer debt at records levels, new car sales will be restricted. Used cars are a better value. Lower cost, less loss on resale, and purchase is for a shorter expected time period.
How does the shorter expected time period of ownership impact purchase of a used car. Technology and rising fuel prices will eventually bring on the transition to alternative energies. It is not economical to purchase a car for 10 years, because within that time a new form of fuel will likely emerge. Presidential candidates as John Edwards are pushing for billions of dollars for development of alternative energy, such as hybrid and electric cars. Thus Warren Buffet has kept his head in the world the average American is living in by selecting CarMax to purchase.
