T HE B UFFETT R EPORT The Investing Secrets of Warren Buffett —and how to profit from them By Professor John Price “After only a few days, we came to the conclusion that we could have saved a lot of our clients’ money if we used these methods.” ─ Ron Boer, Managing Director, Asset Management, The Netherlands Mild Mannered Professor from Sydney, Australia, finds the keys to the stunning success of the world's greatest investor. T HE R ESULT I S … The Buffett Report The Investing Secrets of Warren Buffett —and how to profit from them ¾ If you want to be among the few investors in being able to implement these simple common-sense Buffett-style criteria… ¾ If you’re tired of chasing marginal stocks that risk your capital and confused by all the conflicting reports from the media and investment companies … ¾ If you’ve just plain had enough of stock market movements controlling your life … … then you owe it to yourself to take our 30-Day Risk-Free Trial . ______________________________________________________________________________________________________ DISCLAIMER: The information in this report does not take into account the particular investment objectives, financial situation and needs of any particular investor. As a result, investors using any of the information contained in this document should assess whether it is appropriate in light of their own individual circumstances before acting on any information provided. The information provided in this document is for educational purposes only. It is not intended to give investors specific advice as to whether they should engage in a particular strategy, or buy, sell, or hold any particular security or product specifically mentioned. All prospective purchasers of securities are recommended to make their own enquiries and in particular, seek professional advice from a financial consultant, financial planner or stockbroker before acting on any of the information on this website. In Australia this report is brought to you by John Price, Authorised Representative of Roxburgh Securities Pty Ltd, ACN 009199740. We hold an Australian Financial Services Licence No. 235311, granted by the Australian Securities and Investment Commission. A Simple, Unassuming Man Who Just Happens To Be The World’s Most Successful Investor … Who Forbes’ readers think should be the next USA president HEN YOU STEP into the lobby of 1440 Kiewit Plaza, Omaha, a guard quickly approaches you and politely, but firmly, asks if he can help. The reason is that a few floors above are the offices of Berkshire Hathaway, the US$115 billion dollar company controlled by Warren Buffett. Without an invitation, this is as far as you will get. W With just 15.8 employees (the 0.8 represents a part-timer) Berkshire Hathaway oversees investments in 27 public companies ranging from American Express to Zenith National Insurance. It also has full ownership of 65 private companies ranging from Acme Building Brands to XTRA. Warren Buffett is acknowledged by investors around the world as the world’s greatest investor. Suppose someone had the good sense to invest $10,000 in one of Buffett’s original partnerships back in 1956 when they first started. And suppose that when the partnerships terminated in 1969, this person reinvested the proceeds i n Berkshire Hathaway. Today that person would be worth over $280 million—after all taxes and expenses. But there is much more How a Profit-Maximizing Monopoly Chooses Output and Price How a Profit-Maximizing Monopoly Chooses Output and Price By: OpenStaxCollege Consider a monopoly firm, comfortably surrounded by barriers to entry so that it need not fear competition from other producers How will this monopoly choose its profit-maximizing quantity of output, and what price will it charge? Profits for the monopolist, like any firm, will be equal to total revenues minus total costs The pattern of costs for the monopoly can be analyzed within the same framework as the costs of a perfectly competitive firm—that is, by using total cost, fixed cost, variable cost, marginal cost, average cost, and average variable cost However, because a monopoly faces no competition, its situation and its decision process will differ from that of a perfectly competitive firm (The Clear it Up feature discusses how hard it is sometimes to define “market” in a monopoly situation.) Demand Curves Perceived by a Perfectly Competitive Firm and by a Monopoly A perfectly competitive firm acts as a price taker, so its calculation of total revenue is made by taking the given market price and multiplying it by the quantity of output that the firm chooses The demand curve as it is perceived by a perfectly competitive firm appears in [link] (a) The flat perceived demand curve means that, from the viewpoint of the perfectly competitive firm, it could sell either a relatively low quantity like Ql or a relatively high quantity like Qh at the market price P 1/17 How a Profit-Maximizing Monopoly Chooses Output and Price The Perceived Demand Curve for a Perfect Competitor and a Monopolist (a) A perfectly competitive firm perceives the demand curve that it faces to be flat The flat shape means that the firm can sell either a low quantity (Ql) or a high quantity (Qh) at exactly the same price (P) (b) A monopolist perceives the demand curve that it faces to be the same as the market demand curve, which for most goods is downward-sloping Thus, if the monopolist chooses a high level of output (Qh), it can charge only a relatively low price (Pl); conversely, if the monopolist chooses a low level of output (Ql), it can then charge a higher price (Ph) The challenge for the monopolist is to choose the combination of price and quantity that maximizes profits What defines the market? A monopoly is a firm that sells all or nearly all of the goods and services in a given market But what defines the “market”? In a famous 1947 case, the federal government accused the DuPont company of having a monopoly in the cellophane market, pointing out that DuPont produced 75% of the cellophane in the United States DuPont countered that even though it had a 75% market share in cellophane, it had less than a 20% share of the “flexible packaging materials,” which includes all other moisture-proof papers, films, and foils In 1956, after years of legal appeals, the U.S Supreme Court held that the broader market definition was more appropriate, and the case against DuPont was dismissed Questions over how to define the market continue today True, Microsoft in the 1990s had a dominant share of the software for computer operating systems, but in the total market for all computer software and services, including everything from games to scientific programs, the Microsoft share was only about 16% in 2000 The Greyhound bus company may have a near-monopoly on the market for intercity bus transportation, but it is only a small share of the market for intercity transportation if that market 2/17 How a Profit-Maximizing Monopoly Chooses Output and Price includes private cars, airplanes, and railroad service DeBeers has a monopoly in diamonds, but it is a much smaller share of the total market for precious gemstones and an even smaller share of the total market for jewelry A small town in the country may have only one gas station: is this gas station a “monopoly,” or does it compete with gas stations that might be five, 10, or 50 miles away? In general, if a firm produces a product without close substitutes, then the firm can be considered a monopoly producer in a single market But if buyers have a range of similar—even if not identical—options available from other firms, then the firm is not a monopoly Still, arguments over whether substitutes are close or not close can be controversial While a monopolist can charge any price for its product, that price is nonetheless constrained by demand for the firm’s product No monopolist, even one that is thoroughly protected by high barriers to entry, can require consumers to purchase its product Because the monopolist is the only firm in the market, its demand curve is the same as the market demand curve, which is, unlike that for a perfectly competitive firm, downward-sloping [link] illustrates this situation The monopolist can either choose a point like R with a low price (Pl) and high quantity (Qh), or a point like S with a high price (Ph) and a low quantity (Ql), or some ...THE EFFECTS OF MEGAMERGERS ON EFFICIENCY AND PRICES: EVIDENCE FROM A BANK PROFIT FUNCTION Jalal D. Akhavein* Department of Economics New York University, New York, NY 10012 and Wharton Financial Institutions Center University of Pennsylvania, Philadelphia, PA 19104 Allen N. Berger* Board of Governors of the Federal Reserve System Washington, DC 20551 and Wharton Financial Institutions Center University of Pennsylvania, Philadelphia, PA 19104 David B. Humphrey* F. W. Smith Eminent Scholar in Banking Department of Finance Florida State University, Tallahassee, FL 32306 Forthcoming, Review of Industrial Organization, Vol. 12, 1997 ~eviews expressed do not necessarily reflect those of the Board of Governors or its staff. The authors thank Anders Christensen for very useful discussant’s comments, Bob DeYoung, Tim Hannan, Steve Pilloff, Steve Rhoades, and the participants in the Nordic Banking Research Seminar for helpful suggestions, and Joe Scalise for outstanding research assistance. Please address correspondence to Allen N. Berger, Mail Stop 180, Federal Reserve Board, 20th and C Sts. N. W., Washington, DC 20551, call 202-452-2903, fax 202-452-5295 or -3819, or e-mail mlanbOO@frb.gov. THE EFFECTS OF MEGAMERGERS ON EFFICIENCY AND PRICES: EVIDENCE FROM A BANK PROFIT FUNCTION ABSTRACT This paper examina the efficiency and price effects of mergers by applying a frontier profit function to data on bank ‘megamergers’. We find that merged banks experience a statistically significant 16 percentage point average increase in profit efficiency rank relative to other large banks. Most of the improvement is from increasing revenu~s, including a shift in outputs from securities to loans, a higher-valued product. Improvements were great~t for the banks with the lowest efficiencies prior to merging, who therefore had the greatest capacity for improvement. By comparison, the effects on profits from merger-related changes in prices were found to be very small. JEL Classification Codes:L11, L41, L89, G21, G28 Keywords: Bank, Merger, Efficiency, Profit, Price, Antitrust THE EFFECTS OF MEGAMERGERS ON EFFICIENCY AND PRICES: EVIDENCE FROM A BANK PROFIT FUNCTION I. Introduction The recent waves of large mergers and acquisitions in both manufacturing and service industries in the United States raise important questions concerning the public policy tradwff between possible gains in operating efficiency versus possible social efficiency losses from a greater exercise of market power. If any improvements in operating efficiency from these mergers are large relative to any adverse effects of price changes created by increases in market power, then such mergers may be in the public interest. For an informed antitrust policy, it is also important to know if there are identifiable ex ante conditions that are good predictors of either efficiency improvements or increases in the use of market power in setting prices. Whether or not these mergers are socially beneficial on average, there may be identifiable circumstances that may help guide the policy decisions about individual mergers. Current antitrust policy relies heavily on the use of the ex ante Herfindahl index THE BUFFETT REPORT The Nine Investing Secrets of Warren Buffett —and how to profit from them By Professor John Price “After only a few days, we came to the conclusion that we could have saved a lot of our clients’ money if we used these methods.” ─ Ron Boer, Managing Director, Asset Management, The Netherlands Mild Mannered Professor from Sydney, Australia, finally “cracks the code” behind the stunning success of the world’s greatest investor. THE RESULT IS … The Buffett Report The Nine Investing Secrets of Warren Buffett —and how to profit from them ¾ If you want to be among the few investors in being able to implement these simple common-sense Buffett-style criteria… ¾ If you’re tired of chasing marginal stocks that risk your capital and confused by all the conflicting reports from the media and investment companies … ¾ If you’ve just plain had enough of stock market movements controlling your life … … then you owe it to yourself to take our 30-Day Risk-Free Trial . ______________________________________________________________________________________________________ DISCLAIMER: The information in this report does not take into account the particular investment objectives, financial situation and needs of any particular investor. As a result, investors using any of the information contained in this document should assess whether it is appropriate in light of their own individual circumstances before acting on any information provided. The information provided in this document is for educational purposes only. It is not intended to give investors specific advice as to whether they should engage in a particular strategy, or buy, sell, or hold any particular security or product specifically mentioned. All prospective purchasers of securities are recommended to make their own enquiries and in particular, seek professional advice from a financial consultant, financial planner or stockbroker before acting on any of the information on this website. In Australia this report is brought to you by John Price, Authorised Representative of Roxburgh Securities Pty Ltd, ACN 009199740. We hold an Australian Financial Services Licence No. 235311, granted by the Australian Securities and Investment Commission. A Simple, Unassuming Man Who Just Happens To Be The World’s Most Successful Investor … Who Forbes’ readers think should be the next USA president HEN YOU STEP into the lobby of 1440 Kiewit Plaza, Omaha, a guard quickly approaches you and politely, but firmly, asks if he can help. The reason is that a few floors above are the offices of Berkshire Hathaway, the US$115 billion dollar company controlled by Warren Buffett. Without an invitation, this is as far as you will get. W With just 15.8 employees (the 0.8 represents a part-timer) Berkshire Hathaway oversees investments in 27 public companies ranging from American Express to Zenith National Insurance. It also has full ownership of 65 private companies ranging from Acme Building Brands to XTRA. Warren Buffett is acknowled g ed b y investors around the world as the world’s best investor. Suppose someone had the good sense to invest $10,000 i n one of Buffett’s original partnerships back in 1956 whe n they first started. And suppose that when the partnerships terminated in 1969, this person reinvested the proceeds i n Berkshire Hathaway. Today [...]... for a year CRAZY '08 The turning point came in late September The Tigers had ridden a five-game winning streak to overtake the A s As they faced a threegame series in Philadelphia—already known for its aggressive fans— Detroit was anything but complacent The series would go a long way toward settling matters one way or the other The Tigers won the first game, then a rainout and a Sunday the city of. .. as Cait Murphy makes clear, in the history of what was then, without question, our national pastime Crazy ’08 is fun to read, and it’s an education, too To amuse and inform: What more can you ask of a writer? xi Introduction in the dreary months when baseball is sleeping, an easy way to pick a fight with a fan is to ask: What was the best season in baseball history? The 1991 season has its partisans,... league, the pennant is decided on the last day, the culmination of six months of hard-fought and sometimes bitter baseball Baseball in 1908 has riots and deaths; scandal and arrests; the bizarre (stealing first base) and the beautiful (a perfect game); the sublime (the Brown-Mathewson pitching duels) and the ridiculous (anything to do with Rube Waddell) In 1908, players take the vaudeville stage, knockwurst... spring training, for example, isn’t the antiseptic, analytical baseball laboratory of today, nor is it the relaxed, anecdote-telling circuit Red Smith traveled so pleasantly half a century ago It’s a rowdy, ramshackle, often badly organized, sometimes dangerous, sometimes hilarious adventure And it was an integral element of the odd, vigorous world that baseball was part of in 1908, a crucial year, as... misguided) baserunning Here’s an account of a typical deadball-era scoring rally, from a game on May 23, 1908, between Detroit and Washington: 11 CRAZY '08 Schaefer lined one to center for a bag The Dutchman played with Hughes on the baseline until it was demonstrated that Delahanty was to cover second in case a steal was attempted, and then Schaefer and Crawford worked the hit and run Sam soaked the ball... probably true The larger truth, though, was that the O’s were bad for baseball; attendance in Baltimore fell substantially between 1894 and 1896.20 As violence on the field bred brutality in the stands, respectable folk began avoiding the park Women were hardly seen at all At a time when baseball was sinking roots in cities and towns across the country, league attendance 19 CRAZY '08 stagnated during the. .. Philadelphia’s Baker Bowl In the kind of decision that affirms one’s faith A Theory of Intraday Patterns: Volume and Price Variability Anat R. Admati Paul Pfleiderer Stanford University This article develops a theory in which concen- trated-trading patterns arise endogenously as a result of the strategic behavior of liquidity traders and informed traders. Our results provide a partial explanation for some of the recent empirical find- ings concerning the patterns of volume and price variability in intraday transaction data. In the last few years, intraday trading data for a number of securities have become available. Several empirical studies have used these data to identify various patterns in trading volume and in the daily behavior of security prices. This article focuses on two of these patterns; trading volume and the variability of returns. Consider, for example, the data in Table 1 concerning shares of Exxon traded during 1981. 1 The U-shaped pattern of the average volume of shares traded-namely, the heavy trading in the beginning and the end of the trading day and the relatively light trading in the middle of the day-is very typical and has been documented in a number of studies. [For example, Jain and Joh (1986) examine hourly data for the aggregate volume on the NYSE, which is reported in the Wall Street Journal, and find the same pattern.] Both the variance of price changes We would like to thank Michihiro Kandori, Allan Kleidon, David Kreps Kyle, Myron Scholes, Ken Singleton, Mark Wolfson, a referee, and especially Mike Gibbons and Chester Spatt for helpful suggestions and comments. We are also grateful to Douglas Foster and S. Viswanathan for pointing out an error in a previous draft. Kobi Boudoukh and Matt Richardson provided valuable research assistance. The financial support of the Stanford Program in Finance and Batterymarch Financial Management is gratefully acknowledged. Address reprint requests to Anat Admati, Stanford University, Graduate School of Busi- ness, Stanford, CA 94305. 1 We have looked at data for companies in the Dow Jones 30, and the patterns are similar. The transaction data were obtained from Francis Emory Fitch, Inc. We chose Exxon here since it is the most heavily traded stock in the sample. The Review of Financial Studies 1988, Volume 1, number 1, pp. 3-40. © 1988 The Review of Financial Studies 0021-9398/88/5904-013 $1.50 Table 1 The intraday trading pattern of Exxon shares in 1981 The first row gives the average volume of Exxon shares traded in 1981 in each of the three time periods. The second row gives the standard deviation (SD) of price changes, based on the transaction prices closest to the beginning and the end of the period. and the variance of returns follow a similar U-shaped pattern. [See, for example, Wood, McInish, and Ord (1985).] These empirical findings raise three questions that we attempt to answer in this article: l Why does trading tend to be concentrated in particular time periods within the trading day? l Why are returns (or price changes) more variable in some periods and less variable in others? l Why do the periods of higher trading volume also tend to be the periods of higher return variability? To answer these questions, we develop models in which traders determine when to trade and whether to become privately informed about assets’ future returns. We show that the patterns that have been observed empir- ically can be explained in terms of the optimizing decisions of these ... transportation if that market 2/17 How a Profit- Maximizing Monopoly Chooses Output and Price includes private cars, airplanes, and railroad service DeBeers has a monopoly in diamonds, but it is a much... HealthPill example in the previous exhibit and calculate marginal cost and average cost This monopoly faces a typical U-shaped average cost curve and upward-sloping marginal cost curve, as shown in... total profit is the sum of marginal profits As long as marginal profit is positive, producing more output will 8/17 How a Profit- Maximizing Monopoly Chooses Output and Price increase total profits