Posted by: Nicholas Davis | March 31, 2009

7 good takeaways from an MBA

Along with many of you reading this post, I’ve done my stint at business school – in my case at Said Business School at the University of Oxford. Coming out of the course I had gained an awesome network, a whole new vocabulary and a curious desire to write a management bestseller. What I SHOULD have added to these accomplishments is a list of principles akin to the following piece by Chris Wyser-Pratte, printed in this great article on Portfolio.com:

I learned exactly seven things at Stanford Graduate School of Business getting an MBA degree in 1972. I always used them and never wavered. They were principles that enabled me to put the cookbook formulas that everyone revered in context and in perspective. I think they served my clients (and perhaps me) rather well. Here are those seven principles, and who taught them to me:

  1. Don’t use many financial ratios or formulas, and when you’ve picked the few that will actually tell you what you want to know, don’t believe them very much (Prof. James T.S. Porterfield);
  2. Remember that any damn fool can compute an IRR or DCF. The trick is to find a business that can return 20% after tax, understand its critical indigenous and exogenous variables, and then run it so it meets its return target. (Prof. Alexander Robichek.)
  3. Always ask what can go wrong (Porterfield);
  4. Never extrapolate beyond the observed points of a distribution, you have absolutely no information outside the observed range (Prof. J. Michael Harrison);
  5. Remember that you can always break the bank at Monte Carlo by doubling your bet on red at the roulette table every time you lose. The problem is it will break you first; It’s called “the takeout.” Therefore, always manage your financial structure so that takeout is not an issue. (Porterfield.)
  6. Big M (today Nassim Taleb’s Black Swan) is never a part of the optimal solution. If it shows up in the answer with any coefficient greater than zero, you have the wrong answer and have to continue to do program iterations. (Harrison.)
  7. There is never any excuse for looking through the substance of an economic transaction, whatever the accounting, and if the accounting permits you to do so, it’s wrong (Prof. Charles T. Horngren.)

The article also adds the following comment on Chris’ list, which I take to be the most insightful thing I’ve read today:

Essentially, we moved from a world where banks were run by businessmen, to a world where businesses were run by financiers. Let’s hope that the pendulum will now swing back (only with more women in charge this time around), and that business schools will start de-emphasizing finance in their curricula. But that might be too much to hope for. Even in 1972 students were being taught CAPM. And the vast majority of them failed to ignore it. (my emphasis)

Great insight. And ‘hear, hear’ on the bschool pendulum. Time to write that management book.

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