I have been justly criticized by my friends for having a ‘man-crush’ on Warren Buffett. I find that my mind is stretched more by reading past copies of the Berkshire-Hathaway Annual Report than it was in B-school. More gut-renching for me is the realization that most of what I learned in b-school was proven wrong within months of my graduation by the global economic meltdown. The wisdom of Buffett, however, has only been strengthened by recent market observations. Here, then, is a compilation of everything I wish I’d learned is B-school, but didn’t:
- The efficient market theory is an abstraction that has almost no value in helping us to understand real markets: Were the equity markets efficient before or after October, 2008?.
- Debt is bad: All those nervous nellies who paid too much in taxes for being underleveraged are now cleaning up in the fire-sale of distressed assets.
- Derivatives and other complex financial instruments are alchemy: They create asset bubbles, but they don’t create real value. As my step-father once told me, “the only thing you need to know about options is: don’t”
- The discounted cash flow model is just a rationalization of the institutional imperative: Forward looking models can (and usually do) tell you exactly what you or your boss wants to hear.
- The Capital Asset Pricing Model is wrong: The theory that garnered a Nobel Prize for William Sharpe depends on the notion that risk increases with volatility. As the markets recently demonstrated, risk increases with altitude (the delta between price and value).
That list pretty much covers my entire b-school curriculum, exposes its flaws, and kicks it down the stairs. Buffett’s wisdom, on the other hand, seems likely to endure long past the date when I finally finish paying off my student loan.
If you could only read one piece of Buffettology, the essential piece would be the second half of the 1989 Chairman’s Letter. In my opinion, this should replace Brealey, Myers and Allen in the B-school canon.
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5 Comments
Makes me wonder if this was just your b-school or could a similar criticism be made of all… For what it’s worth, all I know about investing I learned from “investing for dummies”.
Demian – You are SUCH a panting fanboy of Warren Buffett! That’s OK – there are worse $ men to admire, I guess (you tried to get me to admire Eddie Lampert a few yrs back, saying he was a latter-day Buffett. Now I kinda wish his kidnapper had plugged him).
Favorite funny line from the ’89 B.H. Chairman’s Letter: ” Naming the plane has not been easy…We finally settled on “The Indefensible.” Plain spoken, candid and down to earth.
Best under-the-radar online handle for a W.B. admirer: “Harry Bottle”
@andrew, thanks for adding a splash of color to an otherwise dry post. Actually, I’m probably somewhere between a ‘panting fanboy’ and a ‘panting alterboy’
As for Harry Bottle, that was my nickname in prep school, so it’s quite convenient.
@Demian
i read the ’89 chairman’s letter – riveting stuff: Folksy, avuncular common sense. Really interesting to read WB’s comments about zero-coupon bonds and how they were bastardized by I-Bankers in the ’80s. I particularly liked how he called EBDIT a “sawed-off yardstick” and an “abomination” when used as a lax lending standard.
I’m a big Buffett fan as well, although I’m not nearly as well-read on him as you. You might find it amusing that before we left Darden, I did print off ALL of the shareholder letters through 2006 and put them in a binder. I won’t lie … I haven’t finished them yet.