Lecture 4:
MAKING INVESTMENT DECISIONS
Dr. Jay H. Jung
Senior Lecturer in Accounting
1
,Review on Lecture #3
Q1) What are the three benchmarks you can consider
in ratio analyses?
Past periods (time-series analyses)
Similar businesses for the same period (cross-sectional
analyses)
Forecasted performance (e.g., analysts’ forecasts,
managers’ targets)
Q2) What are the shortcomings of using forecasted
performance as a benchmark for a firm’s ratio?
Concerns about the quality of the target numbers (e.g.,
analysts’ forecasts)
Subjective judgments
Susceptible to opportunistic misuses by managers
Q3) What are the examples of investment ratios?
Dividend/stock price
Earnings/number of shares (EPS)
2
Price/earnings (P/E)
,Overview of Lecture #4
Today, we will cover:
Case study – Warren Buffett (2005)
• “Implied” valuations for a private
company
• Comparable company analysis (CCA)
• Acquisition of PacifiCorp by Berkshire
Hathaway
• Warren Buffett’s investment strategies and
philosophy
Investment appraisal methods
• Payback period (PP)
• Net present value (NPV)
3
, Warren Buffett (2005)
Warren Edward Buffett
• Born in 1930 (Omaha, Nebraska)
• Self-made billionaire investor (“The Oracle
of Omaha”)
• 3rd richest person in the world ($60.8
billion in 2016)
• CEO and Chairperson of Berkshire
Hathaway
•
How Buffett Did It: Building Berkshire
Berkshire Hathaway
Hatahway (7 min)
•
• Tour Warren Buffett’s Office (2 min)
American conglomerate holding company (Omaha,
Nebraska)
• 3rd largest public company in the world (Forbes 2000)
• Most expensive stock price (A): USD$ 437,890 (as of 27
October 2021)
• It has many subsidiaries (retail, railroads, jewellery,
4
newspaper, utilities...):
e.g., GEICO, Kraft Heinz, American Express, Wells Fargo, Coca-Cola,
Bank of America, Apple…
MAKING INVESTMENT DECISIONS
Dr. Jay H. Jung
Senior Lecturer in Accounting
1
,Review on Lecture #3
Q1) What are the three benchmarks you can consider
in ratio analyses?
Past periods (time-series analyses)
Similar businesses for the same period (cross-sectional
analyses)
Forecasted performance (e.g., analysts’ forecasts,
managers’ targets)
Q2) What are the shortcomings of using forecasted
performance as a benchmark for a firm’s ratio?
Concerns about the quality of the target numbers (e.g.,
analysts’ forecasts)
Subjective judgments
Susceptible to opportunistic misuses by managers
Q3) What are the examples of investment ratios?
Dividend/stock price
Earnings/number of shares (EPS)
2
Price/earnings (P/E)
,Overview of Lecture #4
Today, we will cover:
Case study – Warren Buffett (2005)
• “Implied” valuations for a private
company
• Comparable company analysis (CCA)
• Acquisition of PacifiCorp by Berkshire
Hathaway
• Warren Buffett’s investment strategies and
philosophy
Investment appraisal methods
• Payback period (PP)
• Net present value (NPV)
3
, Warren Buffett (2005)
Warren Edward Buffett
• Born in 1930 (Omaha, Nebraska)
• Self-made billionaire investor (“The Oracle
of Omaha”)
• 3rd richest person in the world ($60.8
billion in 2016)
• CEO and Chairperson of Berkshire
Hathaway
•
How Buffett Did It: Building Berkshire
Berkshire Hathaway
Hatahway (7 min)
•
• Tour Warren Buffett’s Office (2 min)
American conglomerate holding company (Omaha,
Nebraska)
• 3rd largest public company in the world (Forbes 2000)
• Most expensive stock price (A): USD$ 437,890 (as of 27
October 2021)
• It has many subsidiaries (retail, railroads, jewellery,
4
newspaper, utilities...):
e.g., GEICO, Kraft Heinz, American Express, Wells Fargo, Coca-Cola,
Bank of America, Apple…
