F Analysis

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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
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