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2012: How would Buffett change business schools?
AUDIENCE MEMBER: Hi, Charlie and Warren. My name is Chris Reese. I’m here with a group of MBA students from the University of Virginia in Charlottesville.
In recent years, business schools have taken a lot of blame for some of the recent state of the economy.
What would you suggest to change the way that business leaders are trained in our country?
WARREN BUFFETT: Well, I wouldn’t — I don’t know. Charlie, I wouldn’t blame business schools particularly for most of the ills — would you?
I think they’ve taught to students a lot of nonsense about investments, but I don’t think that’s been the cause of great societal problems. What do you think?
CHARLIE MUNGER: No, but it was a considerable sin. (Laughter)
WARREN BUFFETT: Well, you want to elaborate on what was the more sin —
CHARLIE MUNGER: No, no. I think business school education is improving. (Laughter)
WARREN BUFFETT: Is the implication from a low base or —
CHARLIE MUNGER: Yes. (Laughter)
WARREN BUFFETT: I’d agree with that. (Laughter)
No, in investing, I would say that probably the silliest stuff that we’ve seen taught at major business schools probably has been — maybe it’s because it’s the area that we operate in — but has been in the investment area.
I mean, it is astounding to me how the schools have focused on sort of one fad after another in finance theory, and it’s usually been very mathematically based.
When it’s become very popular, it’s almost impossible to resist if you’re — if you hope to make progress in faculty advancement.
Going against the revealed wisdom of your elders can be very dangerous to your career path at major business schools.
And you know, really, investing is not that complicated. I would have — you know, a couple of the courses. I would have a course on how to value a business, and I would have a course on how to think about markets.
And I think if people grasped the basic principles in those two courses that they would be far better off than if they were exposed to a lot of things like modern portfolio theory or option pricing. Who needs option pricing to be in an investment business?
You know, when people — you know, when Ray Kroc started McDonald’s, I mean, he was not thinking about the option value of what the McDonald’s stock might be or something. He was thinking about whether people would buy hamburgers, you know, and what would cause them to come in, and how to make those fries different than other people’s, and that sort of thing.
It’s totally drifted away — the teaching of investments.
I look at the books that are used, sometimes, and there’s really nothing in there about valuing businesses, and that’s what investing is all about.
If you buy businesses for less than they’re worth, you’re going to make money.
And if you know the difference between the businesses that you can value and the ones that you can’t value, you know, which is key, you’re going to make money.
But they’ve tried to make it a lot more difficult and, of course, that’s what the high priests in any particular arena do. They have to convince the laity that the priests have to be listened to.
CHARLIE MUNGER: The folly creeps into the accounting, too. A very long-term option on a big business you understand — the stock of a big business that you understand — or even a stock market index — should not be — the optimal way to price it is not by using Black Scholes, and yet the accounting profession does that.
They want some kind of a standardized solution that requires them not to think too hard, and they have one. (Laughter)
WARREN BUFFETT: Is there anybody we’ve forgotten to offend? (Laughter)
If you’ll send a note up. (Laughs)