Berkshire Hathaway Phenomenon In the Context of Modern Finance Theory

To begin with, the first stage starts from the moment from when we are first introduced into this world. We face the possibility of risks from the moment we are born. As Petroski mentions,

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).

With Reference to this statement, describe, discuss and illustrate the principles of portfolio theory. Your essay should include coverage of the Markowitz Efficient Frontier and the Capital Market Line.

Week 1 – Introduction – Financial Accounting (Review) Week 2 – Financial Markets and Net Present Value Week 3 – Present Value Concepts Week 4 – Bond Valuation and Term Structure Theory Week 5 – Valuation of Stocks Week 6 – Risk and Return – Problem Set #1 Due Week 7* – Midterm (Tuesday*) Week 8 - Portfolio Theory Week 9 – Capital Asset Pricing Model Week 10 – Arbitrage Pricing Theory Week 11 – Operation and Efficiency of Capital Markets Week 12 – Course Review – Problem Set #2 Due

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.

In regards to investing in stocks, bonds, currencies, or other investment products, it has always been a normal emotion to be happy when a stock price rose and upset when a stock price fell. Yet for Warren Buffet and his team at Berkshire they welcome these declining prices because of the opportunities it brings. According to Warren Buffet, a true investor would be buying stocks and businesses for their entire life, and “with these intentions, declining prices for businesses benefit us, and rising prices hurt us.” Understanding that the investor is going to be a buyer for eternity an investor should

Changing the previously established culture of men working and women maintaining the family and home is a slow process, but it has not been completely in vain. Today, women make up 104 members of the United States Congress and 26 CEOs of Fortune 500 companies. However, the 104 members make up only 19% of Congress and the 26 CEOs represent approximately 5% of the Fortune 500 companies. Evidence such as this is indicative that women in the workplace continue to struggle with the metaphorical glass ceiling (www.economist.com).

Before we examine Berkshire Hathaway and PertoChina financial performance, it necessary to ask first, “What is investing?” According to the book titled, “Behind the Berkshire Hathaway Curtain: Lesson from Warren’s Buffett’s Top Business Leaders,” Ronald Chan explained the meaning of investing. He states that investment is, “Consciously paying more for a stock than its calculated value in the hope that it can soon be sold for a still-higher price.” This definition of investing was philosophizing by Warren Buffet’s mentor, Benjamin Graham, which has a great, influenced in making his investments and business decisions as the CEO of Berkshire Hathaway.

The Black Scholes Merton (BSM) model is the best-known model for valuing options as it is the original of many option pricing models today (Haug and Taleb, 2009; Le, 2015). Developed in 1973 by Fisher Black, Myron Scholes and Robert Merton, the BSM model is still widely used today as the benchmark for many models and techniques that financial analysts use to analyse and determine the fair prices of given options (Jumarie, 2010). It is widely used due to its simplicity however there are many criticisms regarding the assumptions made by the model (Bharath and Sumway, 2008; Haug and Taleb, 2009; Le, 2015)

Buffett initially maintained Berkshire's core business of textiles, but by 1967, he was expanding into the insurance industry and other investments. Berkshire first ventured into the insurance business with the purchase of National Indemnity Company. In the late 1970s, Berkshire acquired an equity stake in the Government Employees Insurance Company (GEICO), which forms the core of its insurance operations today (and is a major source of capital for Berkshire Hathaway's other investments). In 1985, the last textile operations (Hathaway's historic core) were shut down.

Berkshire Hathaway, an American multinational conglomerate holding company, owns a multiple of sub-companies. Managing and hold huge assets, Warren E. Buffett, a investor who needs little introduction as well as the CEO of Berkshire Hathaway, is regarded as one of the most successful and richest businessman. It wholly operates the GEICO, BNSF, Lubrizol, Dairy Queen, Fruit of the Loom, Helzberg Diamonds, FlightSafety International, and NetJets.

Berkshire Hathaway, Inc was a small textile company. Its chairman and CEO of the company is Warren Buffett, the world's third richest man. He invested his partnership in invests in Berkshire Hathaway at the price of $8.6 million (The Essential Buffett, p27). It took him over 35years to grow its book value from $19 per share to $37,987 per share with a rate of 24 percent compounded annually (The Essential Buffett, p44). Buffett started purchasing other businesses, which were primarily insurance companies, with profits from the declining original textile business. In 1985, the original textile business was shut down and Berkshire Hathaway started the insurance business.

* Stock prices change only when there is new info- cannot be predicted ahead of time

This report is going to examine and analyze whether the chosen portfolio with actively picking method was outperformed when comparing with the FTSE 100. The chosen portfolio was constructed and traded in over 3-month period.

During this time period, prices for the stocks increase substantially, accordingly reducing risk premium demanded by the traders. Also, shares should amount from 30 to 55 percent of the entire investment portfolio to optimize the investor’s expected profitability. Proximity of the evaluated results to the reality reveals excellence of the myopic loss aversion model (Siegel and Thaler, 1997).