BILL MILLER AND VALUE TRUST
Teaching Note
Synopsis and Objectives
Suggested complementary case in investment management and financial performance: “Warren E. Buffett, 2005” (Case 1) Set in the autumn of 2005, the case recounts the remarkable performance record of Value Trust, a mutual fund managed by William H. (Bill) Miller III at Legg Mason, Inc. The case describes the investment style of Miller, whose record with Value Trust had beaten the S&P 500 fourteen years in a row. The tasks for the student are to assess the performance of the fund, consider the sources of that success, and to decide on the sustainability of Miller’s performance. Consistent with the introductory nature of this case, the analysis requires no
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Malkiel finds some evidence of “hot hands” and “cold hands,” but concludes that the evidence provides no reason to abandon the theory of capital-market efficiency. Another excellent book by Malkiel, A Random Walk down Wall Street (New York: W.W. Norton & Co., 2003), surveys the evidence for an efficient market in prose accessible to the novice.
Students who are new to the subject of finance may also find it useful to refer to one or more dictionaries of financial terms, such as Barron’s Dictionary of Finance and Investment Terms,6th ed., by John Downes and Jordan Elliot Goodman (Hauppauge, New York: Barron’s Educational Series, Inc., 2002), or The New Palgrave Dictionary of Money and Finance, ed. Newman, Milgate, and Eatwell (New York: Stockton Press, 1992).
Hypothetical Teaching Plan
Assuming the case is taught early in an introductory finance course, the teacher’s classroom strategy can begin with the coin-flipping exercise suggested by Malkiel. All students are asked to stand up and to prepare to flip a coin. At the first and subsequent rounds, those who get tails are asked to sit down. Usually cheers and humor accompany the final rounds.
1. Question for the student who won the coin-tossing game: The case mentions that Burton Malkiel suggests this example. What concept is he trying to illustrate, and how
It is believed that Efficient Market Theory is based upon some fallacies and it does not provide strong grounds of whatever that it proposes. More importantly the Efficient Market theory is perceived to be too subjective in its definition and details and because of this it is close to impossible to accommodate this theory into a meaningful and explicit financial model that can actually assist investors in making the investment decisions (Andresso-O’Callaghan, B., 2007).
As Chapter 10 questions, if further evidence continues to surface that capital markets do not always behave in accordance with the efficient market hypothesis, then should we reject the research that has embraced the EMH as a fundamental assumption? In this regard we can return to earlier chapters of this book in which we emphasised that theories are abstractions of reality. Capital markets are made of individuals and as such it would not (or perhaps, should not) be surprising to find that the
The Yale Endowment is known in the financial industry as a pioneer in using a combination of innovative asset allocation and active management to produce impressive long-term performance. In fact, the Endowment produced a 17.8% average annual return, net of fees, in the ten-year period ending June 30, 2007.1 This performance is particularly impressive given that, in recent years, the Endowment portfolio has carried less than a 40% weighting in equities. Instead, under the leadership of Chief Investment Officer Dave Swensen, the Yale Investments Office
Chapter seven: What does the efficient market theory have to do with Financial markets? Discuss the positives and negatives of the theory. Why do Wall-Street types not like it? Explain the coin flipping experiment, as it relates to investment diversification.
Chapter seven: What does the efficient market theory have to do with Financial markets? Discuss the positives and negatives of the theory. Why do Wall-Street types not like it? Explain the coin flipping experiment, as it relates to investment diversification.
I would give an example of this; Stacey has a checklist of all the qualities that she wants in a boyfriend. The list she has consists of 10 must have qualities. Brad asks Stacey out to the dance on Friday night; Brad meet 5 out of the 10 qualities on Stacey’s checklist so Stacey states that she will think about it. Later that day Nolan asks Stacey out to the same dance, but Nolan meets all 10 of Stacey qualities on her checklist. The probability that Stacey will choose Nolan is twice as much as Brad or 2:1. This teaches them probability in simple terms and gives them a memorable example.
The video begins with Peter Donnelly, a statistician bringing up a coin toss thought experiment. The audience was to guess how often the pattern of coin flip would land Head-Tail-Tail compared to the other pattern of Head-Tail-Head. The three options were: "A" the number of coin tosses for the pattern HTH will be greater compared to HTT. "B" both patters would take on average the same time to repeat themselves. "C" the number of coin tosses for the pattern HTT will be greater compared to HTT. I chose option "B" as my answer because every coin flip is a 50/50 chance of getting either head or tail so on average both patters should repeat them equally. I was surprised to find that most people also vote option "B", but in fact the odds favor option "A". On average, it will take relatively less tosses to get the pattern HTT than HTH, about 8:10 tosses. This is because the pattern HTT has a larger chance for success because a third of the pattern is always established while the pattern head tail head appears in clumps.
In the United States, a society plagued by capitalism, investing has become a way of life. To most Americans it begins with opening a savings account and slowly allowing that money to grow through the compounded interest rate over the years. While it may not seem like a big step in generating more income, nonetheless, this is a positive movement in the market of investments. With the many types of investments available knowing which are reliable, or safe, or yield good returns, are just some of the questions on the investors mind. Within each asset class there are investments to suit different kinds of risk, duration, returns and liquidity.
As of 2005, Value Trust had outperformed its benchmark index, the S&P 500, for 14 years consecutively. Given that the next longest period of sustained performance was only half as long, 14 consecutive years of excellent performance set a record as the longest streak of success for any manager in the mutual-fund industry. The average annual total return for the past 15 years was 14.6%, which was higher than the S&P’s 500 by 3.67%. Value Trust had 36 holdings, 10 of which accounted for nearly 50% of the fund’s assets. Morningstar gave Value Trust a five-star rating.
Moreover, it deals with the immediate opening problem of the case: the market’s response to the PacifiCorp announcement. Finally, it should help to motivate a discussion of Buffett’s investment philosophy.
If you are a new investor who is interested in investment history or how to make investments, purchase this book by Burton G. Malkiel. This book is ideal for any experienced investor who wants to brush up on their knowledge of investment techniques and theories also. There are not many books that have been written about investing. A Random Walk Down Wall Street is broken down into four parts which include; Stocks and Their Value, How the Pros Play the Biggest Game in Town, The New Investment Technology and A Practical Guide for Random Walkers and Other Investors. In total, there are fifteen chapters that cover a lot of key points that many will find interesting and informative.
There is a sense of complexity today that has led many to believe the individual investor has little chance of competing with professional brokers and investment firms. However, Malkiel states this is a major misconception as he explains in his book “A Random Walk Down Wall Street”. What does a random walk mean? The random walk means in terms of the stock market that, “short term changes in stock prices cannot be predicted”. So how does a rational investor determine which stocks to purchase to maximize returns? Chapter 1 begins by defining and determining the difference in investing and speculating. Investing defined by Malkiel is the method of “purchasing assets to gain profit in the form of reasonably
My experience at Villanova, both as a research fellow and a student was formative of my fascination with investments, hedge funds, and mutual funds. My original interest sparked while working with Dr. Velthuis and performing literature reviews on effects of corporate activism on stock prices, and size effects on hedge fund returns. Since then, classes in Portfolio Theory and
The combination of five factors in Yale’s investment philosophy plays an important role to Yale’s successful investment performance. However, among the five factors, the most critical and non-replicable factors are Yale’s ability to identify and invest in inefficient markets and to hire superior managers with aligned incentives; all of which came from expertise and years of experience in the industry. David Swansen’s expertise, in particular, plays a big role.
From September 3rd, 2015 to October 28th, 2015, our group was given the opportunity to manage an investment portfolio, with the goal of maximizing the value of the portfolio through acquiring, holding, and selling stock. The beginning cash balance of the portfolio was $100,000, and our group had the ability to make up to 500 trades. During this time period, our group made 20 stock purchases and sold stock twice. At the close of business on October 28, 2015, the value of our group’s portfolio increased from $100,000 to $106,785.33, yielding a return of 6.78% (((106785.33/100,000)-1) x 100)). In comparison to the S&P 500 returned at 7.16% and the Dow Jones having a return of 8.65% (Yahoo).