Fin 4201/8001 Warren Buffett and Real World Investing

Layout of the Class What’s my grade??? What’s my grade??? Exams = one or two Exams = one or two Group project ≈ Final Group project ≈ Final Participation/Attendance Participation/Attendance What topics? What topics? Warren Buffett Warren Buffett Firm valuation Firm valuation Behavioral Finance Behavioral Finance

Warren Buffett #2 Warren Edward Buffett Net Worth: $40.0 billion Source: Investments, Berkshire Hathaway Self made Age: 75 Marital Status: Widowed, 3 children Hometown: Omaha, NE Education: University of Nebraska Lincoln, Bachelor of Arts / Science Columbia University, Master of ScienceInvestments

Berkshire Hathaway

Firm Valuation Supplemental book, but I’ll give you all you need. Supplemental book, but I’ll give you all you need. Look at syllabus for outline Look at syllabus for outline Presentation as if pitching to Warren Presentation as if pitching to Warren

Behavioral Finance We fall prey to our own heuristics We fall prey to our own heuristics Again supplemental book is good reference Again supplemental book is good reference Efficient Markets Hypothesis Efficient Markets Hypothesis Can’t explain some things Can’t explain some things Examples follow but will examine more later in the course Examples follow but will examine more later in the course

Human Behavior Examples Piece of paper is folded in half, then half again. After 100 folds how thick will it be? Piece of paper is folded in half, then half again. After 100 folds how thick will it be? 1.6 billion trillion miles 1.6 billion trillion miles Compared with what you see on the street, how many of you are above average drivers? Compared with what you see on the street, how many of you are above average drivers? One survey had 82% of respondents claiming to be above average. One survey had 82% of respondents claiming to be above average.

Human Behavior Examples A fair coin has come up “tails” four times in a row. What do you bet on next? A fair coin has come up “tails” four times in a row. What do you bet on next? Honestly, would you really pick tails?? Honestly, would you really pick tails?? Equal chance win $19 vs. lose $20. Equal chance win $19 vs. lose $20. Bet? Bet? Does it change if you are already up $200? Does it change if you are already up $200? House money effect House money effect

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