Management Development Institute

Behavioral Finance & Business Valuation (BFBV)

Instructor: Sanjay Bakshi

Email: sbakshi@mdi.ac.in, sanjay@valuequestcapital.com

Follow Me on Twitter: https://twitter.com/Sanjay__Bakshi

Site: www.sanjaybakshi.net

Blog: http://fundooprofessor.wordpress.com

Introduction

BFBV is a multidisciplinary course spanning over 1½ terms constituting 30 contact sessions.

I will use key ideas from economics, engineering, psychology, mathematics, probability,
accounting, history, neurology, and evolutionary biology to teach BFBV students the narrower
subjects of finance & investing.

Contrary to traditional finance courses based on the “rational man model” in economics, I will
use the “foolish man model” from social psychology and numerous examples from the history
of human follies to help students overcome their own behavioral biases. Students will also
learn how to think about valuation, how to spot mis-priced opportunities in financial markets,
and how to exploit them.

Role Models

As the instructor for BFBV, I will teach specific topics drawn from the work done by some of
the most successful and original thinkers in their fields and include Warren Buffett, Charlie
Munger, Benjamin Graham, Walter Schloss, Philip Fisher, Danny Kahneman, Robert Cialdini, John
Templeton, Martin Whitman, Nassim Taleb, the partners of Tweedy Brown, John Kenneth
Galbraith, Seth Klarman, and Benjamin Franklin.

I will also teach BFBV students important lessons from my own experience acquired over the
last 24 years as a practitioner of deep value investing. Live cases with real-time learnings will be
an integral part of BFBV.

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Course Structure

BFBV will have five components. Each component will help students answer some key
questions:

1. You: Who are you? Are you rational? How do you make decisions? What mistakes do you
make? How can you correct them?

2. Businesses: What’s a good business, a bad business, or a mediocre business and why?

3. People: Who are the people who run businesses? How do you evaluate them? How can
you find intelligent fanatics?

4. Money: How should you approach security markets with an objective of creating long-
term wealth? How should you think about valuation? How should you think about building
portfolios? How should you think about buying, holding, selling decisions?

5. You: Do you really want to be a perfectly rational human being? Is there a moral side to
investing? Who are you now?

Attendance for Guest Lectures

I will be inviting several guest lectures for taking classes in this course. There will be
entrepreneurs and global investors who will come to take classes. It will be compulsory for
students to attend these classes. Anyone who is absent (without my prior permission) will
not be evaluated for the course.

Reference Material

Books

1. “Security Analysis” By Graham & Dodd.

2. “The Intelligent Investor’” by Benjamin Graham.

3. Extracts from the letters of Warren Buffett to the Shareholders of Berkshire Hathaway Inc
from 1978 to 2013.You can get these from www.berkshirehathaway.com

4. “Poor Charlie’s Almanack” by Charlie Munger. Several copies of this book have been kept
in the library, thanks to its editor, Peter Kaufman.

5. “100-to-1 in the Stock Market” by Thomas Phelps.

6. “Extraordinary Popular Delusions and the Madness of Crowds” by Charles Mackay.

7. “The Crowd: A Study of the Popular Mind” by Gustave Le Bon

8. “The Great Crash 1929” by John Kenneth Galbraith.

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9. “A Short History of Financial Euphoria” by John Kenneth Galbraith.

10. “The Power of Noticing: What the Best Leaders See” by Max Bazerman

11. “Stalking the Black Swan: Research and Decision Making in a World of Extreme Volatility” by
Kenneth A. Posner.

12. “The Little Book that Creates Wealth” by Pat Dorsey.

13. “The Investment Checklist” by Michael Shearn.

14. “A Few Lessons for Investors and Managers from Warren E. Buffett” by Peter Bevelin

15. “Seeking Wisdom: From Darwin to Munger” by Peter Bevelin

16. “Value Investing: From Graham to Buffett and Beyond” by Bruce Greenwald

17. “Margin of Safety” by Seth Klarman

18. “Accounting for Value” by Stephen Penman

19. “Common Stocks & Uncommon Profits” by Philip Fisher

20. “Conservative Investors Sleep Well” by Philip Fisher

21. “Developing an Investment Philosophy” by Philip Fisher

22. “Understanding Michael Porter: The Essential Guide to Competition and Strategy” by Joan
Magretta

23. “The Ten Commandments of Business Failure” by Don Keough.

24. “Business Model Generation: A Handbook for Visionaries, Game Changers, and
Challengers” by Alexander Osterwalder,Yves Pigneur.

25. “Brand Breakout: How Emerging Market Brands Will Go Global” by Nirmalya Kumar.

26. “Leverage: The CEO’s Guide to Corporate Culture” by John Childress.

27. “The Aggressive Conservative Investor” by Martin Whitman

28. “Poor Charlie’s Almanack” by Charlie Munger

29. “This Time Is Different: Eight Centuries of Financial Folly” by Carmen M. Reinhardt and
Kenneth S. Rogoff.

30. “Thinking, Fast and Slow” by Daniel Kahneman.

31. “Seeing What Others Don't: The Remarkable Ways We Gain Insights” by Gary Klein.

32. “Influence: Science and Practice” by Robert Cialdini.

33. “The Psychology of Judgment and Decision Making” by Scott Plous.

34. “Why I Failed: Lessons from Leaders” by Shweta Punj.

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35. “Think Like a Freak: How to Think Smarter about Almost Everything” by Steven Levitt and
Stephen Dubner

36. “Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From
The New Science Of Behavioral Economics” by Gary Belsky and Thomas Gilovich.

37. “Being Wrong: Adventures in the Margin of Error” by Kathryn Schulz.

38. “Mistakes Were Made (But Not by Me): Why We Justify Foolish Beliefs, Bad Decisions, and
Hurtful Acts” by Carol Tavris and Elliot Aronson.

39. “Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets” by Nassim
Nicholas Taleb.

40. “The Black Swan: The Impact of the Highly Improbable” by Nassim Nicholas Taleb.

Articles

1. “Are Investors Reluctant to Realize Their Losses?” by Terrance Odean, The Journal of
Finance,Vol LIII, No. 5, October 1998.

2. “Boys will be Boys: Gender, Overconfidence, and Common Stock Investment” by Brad
Barber and Terrance Odean, The Quarterly Journal of Economics, February 2001.

3. “Lord, Charles, Ross, Lee, and Lepper, Mark (1979). 'Biased Assimilation and Attitude
Polarization: The Effects of Prior Theories on Subsequently Considered Evidence',Journal of
Personality and Social Psychology, 37 (11): 2098-2109.

4. “Everybody’s An Expert: Putting predictions to the test.” by Louis Menand, New Yorker,
DECEMBER 5, 2005.

5. “Misunderstanding the Nature of Company Performance: THE HALO EFFECT AND

6. “Why Foxes Are Better Forecasters Than Hedgehogs” by Philip Tetlock.

7. “Market Shock: AAA Rating May Be Junk” by FLOYD NORRIS, New York Times, July 20,
2007.

8. “Dr. Drug Rep” by Daniel Carlat, New York Times, November 25, 2007

9. “Pearls Before Breakfast: Can one of the nation's great musicians cut through the fog of a
D.C. rush hour?” By Gene Weingarten, Washington Post, April 8, 2007.

10. “Is Justin Timberlake a Product of Cumulative Advantage?” by DUNCAN J. WATTS, New
York Times, April 15, 2007

11. “Does Rejection Hurt? An fMRI Study of Social Exclusion” by Naomi I. Eisenberger,
Matthew D. Lieberman, Kipling D. Williams, Science,Vol 302 , 10 October 2003.

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12. “How Rating Firms' Calls Fueled Subprime Mess: Benign View of Loans Helped Create
Bonds, Led to More Lending” By AARON LUCCHETTI and SERENA NG, TheWall Street
Journal, August 15, 2007.

13. “All Fall Down” by Thomas Friedman, New York Times, November 25, 2008.

14. “Triple-A Failure: The Ratings Game” By ROGER LOWENSTEIN, New York Times, April 27,
2008.

15. “Home Equity Frenzy Was a Bank Ad Come True” by Louise Story, New York Times, August
15, 2008.

16. “You don’t have to be a Dupe to be Duped: Lessons from the Madoff Affair” by Robert
Cialdini.

17. Document on “How Warren Buffett runs Berkshire Hathaway’s Insurance Operations.”

18. Document on “Warren Buffett on Incentive Compensation.”

19. “A House Built On Sand” by Carol Loomis, FORTUNE, October 26, 1998.

20. “Lies, Damned Lies, and Managed Earnings” by Carol Loomis, FORTUNE, 

August 2, 1999.

21. “AOL+TWX=???” by Carol Loomis, FORTUNE, February 7, 2000

22. “The 15% Delusion” by Carol Loomis, FORTUNE, February 5, 2001

23. “The Revenue Games People (Like Enron) Play” by Carol Loomis, FORTUNE, March 31,
2002

24. “The Blow-Up Artist: Can Victor Niederhoffer survive another market crisis?” by John
Cassidy, New Yorker, October 15, 2007.

25. “Blowing Up” by Malcom Gladwell, New Yorker, April 22 and 29, 2002.

26. “Veteran Trader Loses Investor, Closes a Fund” by GREGORY ZUCKERMAN, The Wall
Street Journal, October 10, 2007.

27. “Emperor Corzine’s Goldman clothes” by JOHN GAPPER, Financial TImes, November 3,
2011.

28. “Corzine Forgot Lessons of Long-Term Capital” by ROGER LOWENSTEIN, Bloomberg,

Movies and Video Clips

Extracts from these movies and clips will be used in classes:

1. Dot Con - PBS Documentary,

2. Twelve Angry Men

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3. The Fog of War,

4. Maxed Out

5. Boiler Room

6. The Man Who Knew” 60 Minutes documentary on Harry Markopolos’ exposure of Bernie
Madoff,

7. Freakonomics Documentary

8. Glengarry Glen Ross

9. Tin Men,

10. Bugsy

11. Buffett & Munger Videos

12. Seth Klarman Video

13. Prem Watsa Video

14. Peter Cundill Video

15. Joel Greenblatt Video

16. Walter Schloss Video

17. Nassim Taleb Videos

18. Barbarians at the Gate

19. Wall Street

20. Moneyball

21. Thank You For Smoking

22. Trading Places, Selected

23. Several TED Talks,

24. Jiro Dreams of Sushi

25. Discovering Psychology

I advice students to see these movies and videos in totality.

Session Plan

TERM V
1. Lecture 1: Multidisciplinary Thinking

2. Lecture 2: Sense & Nonsense in Modern Corporate Finance

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3. Lectures 3 to 7: The Psychology of Human Misjudgment

4. Lecture 8 to 11: The Graham & Dodd Investing Style

5. Lecture 12 to 16: The Warren Buffett Investing Style

6. Lecture 17 to 20: Cases in Value Investing

TERM VI
Lectures 1 to 10: Cases in a variety of corporate actions including M&A, share buybacks,
leveraged buyouts, leveraged recapitalizations, spinoffs, valuation of a variety of businesses,
bankruptcy investing, investing in uU (unknown and unknowable) situations, sidecar
investments, activist investments, valuation of unique assets, special situations, statistical themes,
and turnarounds.

Evaluation

Component Weight Term V Weight Term VI

Quizzes 20 marks 20 marks

Written Assignments 20 marks —

Mid Term (2 hours, closed book) 20 marks —

End Term (3 hours, closed book) 40 marks —

End Term (2 hours, closed book) — 30 marks

Total 100 marks 50 marks

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