4. Do you agree with the argument that investors with a shorter investment horizon fail to understand the value of a firm as well as investors with a longer investment horizon? Explain.
I do not agree with the above statement. The first part of the statement about shorter term investments was actually right because it cannot really define the success of an investment venture. What makes the statement wrong was the second part which suggests that longer term investors fail to understand the value of a firm. Warren Buffer indirectly stated that investors who make decisions based on short term trends and horizons do not seem to understand how investments really work and the importance of patience in dealing with them; he rather applauded the monitoring of a certain company’s stock performance using a larger time frame. Certainly the share price and performance trends and results over a 5 year period would be more significant and reliable than the ones that an investor could obtain over a 1 year period. In investing, it would almost always be the longer investment horizons that would matter.
5. Do you agree that Warren Buffet’s contributions of shares to charities might be depressing Berkshire Hathaway’s share price? Explain.
Yes. In fact, I believe it is the single and most potent reason why Berkshire Hathaway’s share prices went on a nosedive despite Warren Buffet’s prediction that the company would continue to do good until the end of the year, just like what happened the past year. Warren Buffet and a significant number of long-time shareholders regularly sell their shares to be able to donate to various charitable institutions. This, plus the fact that there have been a considerably low number of a company’s share buyers in the last couple of months or even years would surely lower the price of the company’s stocks.
7. Berkshire Hathaway’s stock price has risen 19% since it announced a share buyback program. Why might share buybacks push a firm’s stock price higher?
A share buyback program is basically the process wherein the company, which in this case is the Berkshire Hathaway, repurchases its own stock either from other active shareholders or from the open market. It uses its capital, in cash, to buy stocks. The stock market generally adheres to the principle of supply and demand. So whenever an entity buys a certain company’s stock, the stock prices tend to go higher; the more shares that were bought, the higher the stock price goes. It is the opposite that happens when a shareholder sells his or her shares. So in the case of Berkshire Hathaway’s announcement of a share buyback program, it is only perfectly normal for the stock price to rise up to 19%.
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Swanson, J., et al. A Practitioner’s Guide to CorRestructuring, Andrew Miller’s Valuation of a Distressed Company. Kirkland and Ellis International LLP, 2008.