Columbia University

Graduate School of Business

B8313-02 – Security Analysis
Spring 2007

Professor Michael J. Mauboussin

Table of Contents
Part One

Section 1 - Capital Markets

Jeremy J. Siegel 1
Stock and Bond Returns Since 1802
(Stocks for the Long Run, 2nd Edition)

Burton G. Malkiel 23
Firm Foundations and Castles in the Air
(A Random Walk Down Wall Street)

Steven Crist 34
Crist on Value
(Bet with the Best)

Jack L. Treynor 48
Market Efficiency and the Bean Jar Experiment
(Financial Analysts Journal - May/June 1987)

Charles D. Ellis 52
The Loser’s Game
(Financial Analysts Journal - July/August 1975)

Peter L. Bernstein 58
Are Financial Markets the Solution or the Problem?
(Financial Analysts Journal – July/August 1975)

John Maynard Keynes 62

The State of Long-Term Expectation
(The General Theory of Employment, Interest, and Money)

Michael J. Mauboussin 72
Revisiting Market Efficiency: The Stock Market as a Complex Adaptive System
(Journal of Applied Corporate Finance – Volume 14, November 4 – Winter 2002)

Michael J. Mauboussin 81
Capital Ideas Revisited: The Prime Directive, Sharks, and the Wisdom
of Crowds
(Legg Mason Capital Management – March 2005)

Michael J. Mauboussin 100

Capital Ideas Revisited-Part 2: Thoughts on Beating a Mostly-Efficient Stock
Market Index
(Legg Mason Capital Management – May 2005)

W. Brian Arthur 112

Complexity in Economic and Financial Markets
Complexity
Section 2 - Valuation

John Burr Williams 128

(The Theory of Investment Value)

Merton H. Miller and Franco Modigliani 139

Dividend Policy, Growth, and the Valuation of Shares

Franco Modigliani and Merton H. Miller 163

The Cost of Capital, Corporation Finance and the Theory of Investment
The American Economic Review

Merton H. Miller 200

The Modigliani-Miller Propositions After Thirty Years
Journal of Economic Perspectives

Michael J. Mauboussin, Alexander Schay, Patrick McCarthy 223

Competitive Advantage Period “CAP” –
At the Intersection of Finance and Competitive Strategy
(Credit Suisse First Boston, October 4, 2001)

Michael J. Mauboussin 243

Common Errrors in DCF Models
(Legg Mason Capital Management – March 2006)

Section 3 - Strategy

Michael J. Mauboussin and Kristen Bartholdson 256

Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation
(Credit Suisse First Boston, December 16, 2002)

Michael E. Porter 309

What is Strategy?
(Harvard Business Review, November/December 1996)

James M. McTaggart, Peter W. Kontes, Michael C. Mankins 329

Resource Allocation
The Value Imperative, The Free Press 1994

W. Brian Arthur 346

Increasing Returns and the New World of Business
Harvard Business Review, July/August 1996
Part Two

Section 4 - Decision Making Theory/Behavioral Finance

Max H. Bazerman 357

Judgment under Uncertainty
(Judgment in Managerial Decision Making)

Michael J. Mauboussin 383

Decision Making for Investors
(Legg Mason Capital Management – May 2004)

J. Edward Russo, Paul J. Schoemaker 403

Decision Traps and How to Avoid Them
Chemical Engineering, May 1991

Werner F.M. DeBondt and Richard H. Thaler 407

Does the Stock Market Overreact?
(The Journal of Finance - July 1986)

Michael J. Mauboussin and Alfred Rappaport 421

Pitfalls to Avoid
(www.expectationsinvesting.com, 2001)

Arthur Zeikel 428

On Thinking
(Financial Analysts Journal - May/June 1988)

Section 5 - Buffett/Munger

Warren Buffett and Charlie Munger 433

We Want Something That Shouts At Us. If It's Close, We Don't Play...
(Outstanding Investor Digest - June 1993)

Charlie Munger 453

A Lesson on Elementary, Worldly Wisdom as it Relates
to Investment Management & Business
(Outstanding Investor Digest - May 1995)

Charlie Munger 469

Wesco Financial’s Charlie Munger Worldly Wisdom Revisited:
Lesson #2 “How Do You Get Worldly Wisdom? Just Take the Best Models
From all Disciplines.”
(Outstanding Investor Digest – December 1997)

Charlie Munger 478

Wesco Financial’s Charlie Munger Worldly Wisdom Revisited:
Lesson #2, Part 2 “Master the Best that Others have Figured Out. No One’s
Smart Enough to Dream it Up Himself.”
(Outstanding Investor Digest – March 1998)

Charlie Munger 496

Academic Economics: Strengths and Faults After Considering
Interdisciplinary Needs
(Speech given at the University of California, Santa Barbara, Economics
Department, 2003)

Charlie Munger 521

A Lesson on Elementary, Worldly Wisdom as it Relates to Investment Management
and Business
(Speech given at the USC School of Business, 1994)
Warren Buffett 540
Berkshire Hathaway Inc., Letters to Shareholders, 1982

Warren Buffett 559

Berkshire Hathaway Inc., Letters to Shareholders, 1986

Warren Buffett 590

Berkshire Hathaway Inc., Letters to Shareholders, 1987

Warren Buffett 619

Berkshire Hathaway Inc., Letters to Shareholders, 1988

Warren Buffett 646

Berkshire Hathaway Inc., Letters to Shareholders, 1991

Warren Buffett 668

Berkshire Hathaway Inc., Letters to Shareholders, 1992

Warren Buffett 695

Berkshire Hathaway Inc., Letters to Shareholders, 1994

Robert C. Hagstrom, Jr. 720

Buying a Business
(The Warren Buffett Way)

Warren Buffett 732

The Superinvestors of Graham-and-Doddsville
(The Intelligent Investor)

Section 6 - More Than You Know / Consilient Observer

Michael J. Mauboussin 745

The Babe Ruth Effect: Frequency Versus Magnitude in Expected Value
(More Than You Know: Finding Financial Wisdom in Unconventional Places)

Michael J. Mauboussin 751

Diversify Your Mind: Thoughts on Organizing for Investment Success
(More Than You Know: Finding Financial Wisdom in Unconventional Places)

Michael J. Mauboussin 757

A Tail of Two Worlds
(More Than You Know: Finding Financial Wisdom in Unconventional Places)

Michael J. Mauboussin and Kristen Bartholdson 763

Puggy Pearson’s Prescription: All Any Investor Needs to Know
(Credit Suisse First Boston, TCO, Volume 1, Issue 11, June 4, 2002)

Michael J. Mauboussin 767

The Janitor’s Dream: Why Listening to Individuals Can Be Hazardous to Your Wealth
(More Than You Know: Finding Financial Wisdom in Unconventional Places)

Michael J. Mauboussin 772

Beware of Behavioral Finance: Misuse of Behavioral Finance Can Lead to
Bad Thinking
(More Than You Know: Finding Financial Wisdom in Unconventional Places)

Michael J. Mauboussin 777

Is There a Fly in Your Portfolio?: What an Accelerating Rate of Industry Change
Means for Investors
(More Than You Know: Finding Financial Wisdom in Unconventional Places)
Michael J. Mauboussin 782
The Hot Hand in Investing: What Streaks Tell Us About Perception, Probability,
and Skill
(More Than You Know: Finding Financial Wisdom in Unconventional Places)

Michael J. Mauboussin 788

Investing: Profession or Business?: Thoughts on Beating the Market Index
(More Than You Know: Finding Financial Wisdom in Unconventional Places)

Michael J. Mauboussin 796

Be the House: Process and Outcome in Investing
(More Than You Know: Finding Financial Wisdom in Unconventional Places)

Michael J. Mauboussin 802

Time is On My Side: Myopic Loss Aversion and Portfolio Turnover
(More Than You Know: Finding Financial Wisdom in Unconventional Places)

Michael J. Mauboussin 810

I’ve Fallen and I Can’t Get Up: Mean Reversion and Turnarounds
(More Than You Know: Finding Financial Wisdom in Unconventional Places)

Michael J. Mauboussin and Kristen Bartholdson 816

The Low Down on the Top Brass: Management Evaluation and the
Investment Process
(Credit Suisse First Boston, TCO, Volume 2, Issue 22, December 2, 2003)