Warren Buffett Essay Example

flows and discount rates can be difficult, if not impossible. Although risk is unavoidable, extensive research can help limit it to some extent. Matching the discount rate used with the investment strategy, as Buffet does through thorough research and hands-on involvement in invested firms, enables more accurate estimates. Shareholders of Berkshire Hathaway should support the acquisition of Pacific if they understand the company and its potential benefits. This acquisition aligns with PH's investment strategy of making large "elephant" investments to increase net worth. Pacific generates consistent revenues from the energy industry and is profitable. By acquiring Pacific, PH increases its intrinsic value per share by 2.4%, which aligns with their stated goal.

The text discusses the performance of a portfolio manager in outperforming the market within their own risk parameters. In another case, Bill Miller and Value Trust heavily invested in financial and stocks related to the US housing market, resulting in significant losses during the SGF crisis. Despite the seriousness of the situation, Bill Miller failed to realize it and doubled down on the investments. As a result, Value Trust has underperformed the S;IPPP for the past 6 years, losing $18 billion in assets since 2006 and reducing its size from $20.1 billion to $2.8 billion.

The fund has an annual loss of 6.9% and a cumulative loss of 30% up to March 2012 (Light, Laurite 2011). To measure investment performance, one can compare an actively traded fund that attempts to outperform the market to an index such as S;IPPP, which represents the market.

Net Asset Value is used to gauge performance by dividing total assets minus liabilities by the fund's outstanding shares and determining mutual funds'

price per share. Good performance in investment means achieving higher returns than the market index or similar benchmarks.

They determine performance by comparing NAVA's annual growth rate and their past investment's value with a benchmark market portfolio.The manager employs a strategy called the "concentration strategy" which involves actively investing in undervalued shares with low diversification, taking risks, purchasing in bulk at low prices, and exploiting an irrational and pessimistic market. However, investment strategies need to be flexible as luck also plays a role. The portfolio manager's role is to expertly manage securities for inexperienced investors who require customization based on their risk tolerance, income needs, and investment time horizons.

Fundamental and technical securities analysis differ in their approaches. Technical analysts focus on past market statistics like prices and trading volumes to identify trends without determining intrinsic value or predicting the future. On the other hand, fundamental analysts estimate a stock's intrinsic value by analyzing factors such as the economy, industry, competitors, and management skills.

When comparing mutual fund performance to the overall market, risk-adjusted gross returns tend to mirror those of the market. However, after deducting transaction fees and annual payments to fund managers, average returns were 1% lower in 1968 but remained unchanged in 1977 (Burner 2010).Capital market efficiency is the concept that stock prices incorporate all available information, making it difficult to consistently surpass the market using any strategy. If capital markets are efficient, investors are better off purchasing and holding a market index rather than attempting to outperform it. However, an inefficient market could provide opportunities for investors to earn abnormal profits by identifying undervalued shares. The implications for fund managers depend on whether

the market demonstrates strong, semi-strong, or weak efficiency characteristics. In a strongly efficient market, where stock prices instantly reflect all information, fund managers would have limited chances of consistently outperforming the market. In a semi-strongly efficient market, where publicly accessible information is already factored into stock prices, fund managers may still have some opportunities for outperformance through private information or analysis. In a weakly efficient market, where only past prices and trading volumes impact stock prices, fund managers might have more possibilities to beat the market with technical analysis or other strategies. Weak efficiency implies that today's share price incorporates all previous prices; hence fund managers cannot use technical analysis to price shares but can utilize fundamental analysis instead.Semi-strong efficiency implies that the stock price reflects all past and publicly available information, rendering both fundamental and technical analysis ineffective in valuing a share. Only those with insider knowledge can profit from trading. On the other hand, strong efficiency suggests that all information is incorporated into the share price, making it impossible to earn abnormal returns. Managers should not waste resources attempting to do so.

In 2005, I would caution against investing in Miller's value trust due to its association with pursuing "hot money." While I believe it is feasible for a winning streak to persist for another 15 years, Miller's strict adherence to his investment philosophy and inflexible strategy will ultimately lead to failure.

I acknowledge that the market operates with weak efficiency.

References:
Burner, Decades, Chill (2010). Case Studies in Finance - managing for corporate value creation. McGraw-Hill/Larkin: New York.
Case one & two, p 3-38.
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