I have always been a fan of the notion that experience teaches better then school. I think from an entrepreneur perspective, though I myself have yet to build a successful company, I'm a fan of the idea of trying things in the world and seeing what will happen as opposed to learning business topics in a classroom. Even if these things fail in the real world, it's possible to see why it failed, what sorts of things should of been paid attention to and executed, and business lessons are learned first hand. Of course it's good to be knowledgeable in business topics from academia, however it doesn't mean that understanding these subjects will convert into business success. As a hiring manager of a technology team, I have always looked for a history of execution and of building things from the candidates as opposed to strict schooling results. Much smarter people then I have written on this subject here:
Marc Andreessen take for one.
To take this notion further, Charlie Munger as most of you know is Warren Buffet's partner. He gave a compelling and intuitive lecture on Economics at the University of California in 2003.
Charlie himself never took a course in Economics. Yet he's invited to conduct this lecture. So his lecture speaks significantly from economics and business experience learned on the job - and I'm a fan.
The lecture is here.
Here are some great excerpts:
Berkshire has never believed in the academic concept in Economics called the Efficient Market Theory.
"One of the worst examples of what physics envy did to economics was cause adaptation and hard-form efficient market theory. And then when you logically derived consequences from this wrong theory, you would get conclusions such as: it can never be correct for any corporation to buy its own stock. Because the price by definition is totally efficient, there could never be any advantage. QED. And they taught this theory to some partner at McKinsey when he was at some school of business that had adopted this crazy line of reasoning from economics, and the partner became a paid consultant for the Washington Post. And Washington Post stock was selling at a fifth of what an orangutan could figure was the plain value per share by just counting up the values and dividing. But he so believed what he’d been taught in graduate school that he told the Washington Post they shouldn’t buy their own stock. Well, fortunately, they put Warren Buffett on the Board, and he convinced them to buy back more than half of the outstanding stock, which enriched the remaining shareholders by much more than a billion dollars. So, there was at least one instance of a place that quickly killed a wrong academic theory."
Some simple micro-economic thinking can lead to powerful understanding of macro-economic forces:
"Case study: Nebraska Furniture Mart’s new store in Kansas City
Let me demonstrate the power of microeconomics by solving two microeconomic problems. One simple and one a little harder. The first problem is this: Berkshire Hathaway just opened a furniture and appliance store in Kansas City [www.nfm.com/store_kansascity.asp]. At the time Berkshire opened it, the largest selling furniture and appliance store in the world was another Berkshire Hathaway store, selling $350 million worth of goods per year. The new store in a strange city opened up selling at the rate of more than $500 million a year. From the day it opened, the 3,200 spaces in the parking lot were full. The women had to wait outside the ladies restroom because the architects didn’t understand biology. (Laughter). It’s hugely successful.
Well, I’ve given you the problem. Now, tell me what explains the runaway success of this new furniture and appliance store, which is outselling everything else in the world? (Pause).
Well, let me do it for you. Is this a low-priced store or a high-priced store? (Laughter). It’s not going to have a runaway success in a strange city as a high-priced store. That would take time. Number two, if it’s moving $500 million worth of furniture through it, it’s one hell of a big store,
furniture being as bulky as it is. And what does a big store do? It provides a big selection. So what could this possibly be except a low-priced store with a big selection?
But, you may wonder, why wasn’t it done before, preventing its being done first now? Again, the answer just pops into your head: it costs a fortune to open a store this big. So, nobody’s done it before. So, you quickly know the answer. With a few basic concepts, these microeconomic problems that seem hard can be solved much as you put a hot knife through butter. I like such easy ways of thought that are very remunerative. And I suggest that you people should also learn to do microeconomics better."
Another favorite part of mine on financial projections:
"Usually, I don’t use formal projections. I don’t let people do them for me because I don’t like throwing up on the desk (laughter), but I see them made in a very foolish way all the time, and many people believe in them, no matter how foolish they are. It’s an effective sales technique in America to put a foolish projection on a desk.
And if you’re an investment banker, it’s an art form. I don’t read their projections either. Once Warren and I bought a company and the seller had a big study done by an investment banker, it was about this thick. We just turned it over as if it were a diseased carcass. He said, “We paid $2 million for that.” I said, “We don’t use them. Never look at them.”
Another favorite part is the discussion on
synthesis. He uses an example of Ricardo’s principle of
comparative advantage in trade, and the other is Adam Smith’s
pin factory. And while these are two very different systems Charlie shows how they work together:
"Berkshire had this former savings and loan company, and it had made this loan on a hotel right opposite the Hollywood Park Racetrack. In due time the neighborhood changed and it was full of gangs, pimps, and dope dealers. They tore copper pipe out of the wall for dope fixes, and there were people hanging around the hotel with guns, and nobody would come. We foreclosed on it two or three times, and the loan value went down to nothing. We seemed to have an insolvable economic problem -- a microeconomic problem.
Now we could have gone to McKinsey, or maybe a bunch of professors from Harvard, and we would have gotten a report about 10 inches thick about the ways we could approach this failing hotel in this terrible neighborhood. But instead, we put a sign on the property that said: “For sale or rent.” And in came, in response to that sign, a man who said, “I’ll spend $200,000 fixing up your hotel, and buy it at a high price on credit, if you can get zoning so I can turn the parking lot into a putting green.” “You’ve got to have a parking lot in a hotel,” we said. “What do you have in mind?” He said. “No, my business is flying seniors in from Florida, putting them near the airport, and then letting them go out to Disneyland and various places by bus and coming back. And I don’t care how bad the neighborhood is going to be because my people are self-contained behind walls. All they have to do is get on the bus in the morning and come home in the evening, and they don’t need a parking lot; they need a putting green.” So we made the deal with the guy. The whole thing worked beautifully, and the loan got paid off, and it all worked out.
Obviously that’s an interaction of Ricardo and the pin factory examples. The odd system that this guy had designed to amuse seniors was pure pin factory, and finding the guy with this system was pure Ricardo. So these things are interacting."
Then there is a great part about reaching to other sciences and fields and learning subjects there, then applying them to whatever problem you're tackling. Charlie mentions it's like having a bigger toolbox to deal with a problem - and I think it's a brilliant way of looking at it.
Go Charlie!
