What They Don’t Teach You in Business School

Last week I talked to a group of college students in a portfolio management class at one of the local universities here in Michigan. The topic was open-ended so I wanted to share with them a few of the things I wish I would have learned in school that weren’t taught or apparent to me at the time.

Here are a few things I think are overlooked at most business schools:

How to deal with people. It always amazes me how much emphasis schools place on knowledge, theories, and models, but they rarely focus on the one skill that everyone needs to master — dealing with other people. Ninety-nine times out of a hundred I’d rather work with a B student who has social skills than an A student who has no idea how to communicate or work with other people.

Theory requires context. One of the students asked for my thoughts on the efficient frontier and mean-variance optimization. I told them that the general idea behind these theories has been very helpful to the portfolio management industry in a number of ways. Diversification and the idea that adding together investments that behave differently in a portfolio is an important concept.

But you can’t take these types of models literally. Correlations and market relationships are constantly changing. Nothing is stable and the past isn’t a perfect window into what’s going to happen in the future. The efficient frontier shows you the best risk-adjusted returns from a historical dataset. It can’t tell you what the perfect asset allocation will be in the future.

Models and textbook theories can play a role in building your knowledge base, but they never tell the whole story. Many people make the mistake of taking them at face value without thinking through the real world implications. No model is perfect, so the majority of the time what really matters is the interpretation by the end user.

Read, read, read. I must have wasted thousands of dollars on textbooks in college. It’s not that textbook knowledge isn’t helpful, but looking back on it now I’m shocked at how few books I was assigned to read outside of academic textbooks. There are so many great books out there on business, investing, history, leadership, psychology, etc. that cost a fraction of what students spend on textbooks and contain far more useful and practical information.

The majority of my own learning experience came after college from reading as many books as possible. I wish I would have started this process earlier. I don’t understand why more colleges don’t simply do away with most textbooks and allow students to learn from some of history’s great thinkers, investors, business leaders, economists and authors. You can learn more from Warren Buffett’s collection of annual shareholder letters (which are available online for free) than what they teach in best MBA programs in the country. It boggles my mind that I was never required to read these when I was in school.

There’s no such thing as a perfect business model. The Harvard case studies about successful businesses were always interesting, but what they failed to mention is the number of companies that tried the exact same strategy and failed. Successful companies usually have a wonderful product, leader or strategy, but also a heavy dose of luck. No one tells you about luck when you’re going to business school because it’s not quantifiable.

Good luck with those macroeconomics courses. The majority of what I learned in my econ courses in college has been disproved in the past decade or so. Everything we were taught about monetary policy, interest rates and inflation was wrong. But it sounds intelligent in a textbook, so there’s that.

Incentives matter. The first place to look when trying to figure out someone’s motivation for doing something in the business world is their incentive structure. Incentives shape outcomes more than most would like to believe. Pay attention to incentives and you’ll be able to understand the majority of the actions people and businesses take, whether they’re rational or not.

Sales. Most people have a negative attitude towards selling. The first thing that comes to mind for most is a sleazy used car salesman. But you can never escape sales in the business world. Every business is selling a product or service. And in many respects, to get ahead you have to learn how to sell your own accomplishments and skill set. Persuasion is an under-appreciated, but very important in getting ahead in business.

Psychology and human behavior should be prerequisites. In a recent interview, I said if I had to do it all over again I would have studied psychology in college. I was never required to take one psychology class in all of my years of undergrad or graduate school. Maybe this is because there’s no formula, equation or proof about human behavior, but I think this is a huge mistake. Thinking, Fast and Slow should be required reading for anyone going into business.

There are no classes called ‘Investing is Hard.’ This was probably the main message I tried to convey to these students because they were in a class that required them to invest real money on behalf of the school through their class. No one ever really tells you how hard it can be to earn excess returns in the markets. At that age, you’re worried about creating the most precise Excel model you can to accurately value a business. Figuring out that successful investing is not easy is actually one of the first steps you have to take to become a better investor.  

Further Reading:
The CFA vs. MBA Decision
There’s No Such Thing as Precision in the Markets