Wednesday, March 27, 2013

Is the MBA under attack, too?

The MBA: Evolving and Adapting
Press reports in the past year have occasionally announced the dismal state of the law degree. They've shown the downward trends in law school applications and the widespread lack of opportunities for new law graduates. And there is a lively, fiery debate about what is and what should be a legal education. A law student spends three years in school and, after assuming huge debt loads and making boundless financial sacrifices, graduates into the great unknown.

Should she head for the dungeons of corporate law? Should he explore other channels (the public sector, e.g.), where limited opportunities for sustained employment exist? What should they do, when legal positions have dwindled in large numbers across the country in recent years? Should law schools take the lead in assisting their graduates? (Some have done just that in the past year, by hiring some of their own graduates or subsidizing them in their first-year jobs.) Should law schools spearhead a radical change in legal education by eliminating the third year of classes and permit students to launch careers with one less year of burdensome debt?

Law deans, judges, attorneys, prospective students and law professors are in the midst of a vigorous discussion about the future of the law degree and the roles and responsibilities law schools will have. (See Third-year Overhaul at NYU, Law Schools Worth the Money?)

Is the MBA similarly under attack and similarly encountering a dismal outlook? Are there similar declines in applications (to business school), decreasing opportunities across the board, and calls to contract two years of full-time business school into a fast-track, 10-12-month degree?

Or is this an apples-and-oranges debate?

Trends in applications and enrollment at law schools and business schools run along different, sometimes similar tracks. They are both affected by various factors--some the same, others very different.  While law schools experienced application declines over the past decade, business schools did so, too.  The recession and financial crisis had impact on both. Yet applications at some business schools began to rise a year or two after the peak crisis years of 2008-09, partly because some young professionals decided to try to "wait out" those years of turmoil in productive ways, by returning to school.

Both degrees are influenced by stark business factors. Banks, insurance companies, and hedge funds reduce staff quickly (and often rashly) when there is a decline in revenues, deal flow or clients. Law firms  experience a concurrent decline, too, and reduce staff or decide to hire fewer associates.  And reductions, lay-offs and bleak opportunities discourage prospects from applying to law and business schools. 

Both are influenced by the mind-boggling, irrational increases in tuition and fees.  Candidates for the MBA or JD will often have the interest, aptitude and time commitment. They will dream of coursework in legal theory, contracts, property, accounting, corporate finance or business policy. They will aspire to become partners in corporate law firms or consulting firms. But they can't rationalize the costs and the likely absorption of too much debt.  

But factors that influence financial institutions--like reform and regulation--might have a different kind of impact on law firms, which might step up to assist in regulatory compliance. Other factors--like a trend for companies to out-source basic legal chores to low-cost sites overseas-- have a detrimental impact on corporate law firms in the U.S.

Still, the swirl of nerves and a trace of panic that might be usurping some law deans doesn't yet seem to be doing the same in business schools. That might be partly due to the fact that business deans are accustomed to change and almost always encounter uncertainty about their purposes in the future.

MBA application trends at top schools slid significantly in the crisis years, but in the past year or so, there are fleeting signs of an upturn.  Consortium school UCLA, for example, had a 22% increase in MBA applications last year.  After a two-year decline, applications to Stanford Business School rose this year. (They fell below 7,000, but are approaching that magic threshold again.)

Two years ago, applications to Columbia Business School fell 19%--a cause for concern and something the school blamed on the languishing state of Wall Street, since the school has always had a bustling pipeline of MBAs going into banking and finance.  Yet applications rose 9% last year and seem to be on an upward trend again (above 6,000)--thanks in part to a more settled state on the Street. Applications at Consortium school Dartmouth have increased the past two years, and Consortium school Yale will likely boost applications above 3,000 as it moves into a new facility.

Recent reports show over 286,000 GMAT tests were scored last year--an 11% increase. That's partly attributed to the large number of foreign students interested in the MBA (16% increase).  In fact, only a third of the tests taken are from U.S.-based candidates, proving how the soaring interest from international students has helped to boost or sustain interest in the MBA.

However, a few other factors might explain why the MBA is not yet under attack any more than it has always been:

1.  Law schools, all of a sudden, find they must explore ways to reinvent themselves or redefine legal education.  Business schools, on the other hand, over the past two decades have routinely tried to reinvent, redefine and innovate--some more successfully than others, some more radically than others.  Many contend business schools still haven't kept up with the changing business times sufficiently, but few accuse them of not trying.

Witness the changes in curriculum and core courses at top schools every other year. Witness, too, how schools hopped at the chance to understand e-commerce and Internet businesses. Notice the grand push by the same schools to require international experience and courses in ethics, decision-making, and risk management. 

2.  Certain industry sectors still require the MBA degree as if it were a certification. They see specific value in the MBA and hire from the business-school pool routinely each year.  They include consulting, investment banking, and many firms in investment management, trading and research.  As long as Goldman Sachs and McKinsey thrive, it appears, they will a large batch of MBAs from top schools year after year to fill the ranks and to offset expected attrition. And as long as Goldman and McKinsey hire, others in the industry will follow suit. 

3.  Business schools try to respond to economic and business trends and to the voice of a large corporate constituency.  They listen to what business cycles suggest or what business leaders look for in a next generation of leaders.  They respond by revamping curriculum, introducing new courses in, say, entrepreneurship or international development, or by teaching the lessons learned from a recent crisis or marketing debacle. Some respond well; some respond inadequately, but most try.

4.  The influx of foreign students has changed the face of most top schools.  It's no longer unusual for top schools to have large numbers of students from India, China, Pakistan, Nigeria and Latin America.  They recruit internationals, and they have successfully rationalized the benefit of a diverse, world-oriented student body.

Foreign countries have been eager to send some high-potential junior managers to MBA schools like Virginia, Michigan or USC to learn from the gurus of management and finance--with hopes they will return to their home countries to fill the management gaps of a growing, developing economy.  Many have observed or written about China's obsession speed up economic develop by hiring trained middle managers to run an exploding (at least until recently) business growth. An MBA education, especially from a U.S.-based school, provides a solution or a quick fix.

If the topic is business schools and MBAs, there will always be debate about the relevance of MBA degrees and uncertainty about how schools encounter evolving business scenarios. Seldom a day goes by without a business-school dean grappling hard with how the school will adapt and fend itself from the factions who attack it.

Tracy Williams

See also:

CFN: The MBA--Remaining Relevant, 2011

Monday, March 25, 2013

Bound for NOLA, 2013

The Consortium's 47th annual Orientation Program for new MBA students will take place June 7-12 in New Orleans. As usual, the Consortium Finance Network hopes to have a presence there, as it invites new students interested in finance to join CFN.

Registration is now open for Consortium alumni and sponsors. The OP's theme this year is "Upgrading Your Career, 2.0 (13)."

New MBA students from the 17 Consortium schools this year will be assigned to industry tracks in finance, consulting, marketing and general management, permitting students to focus on events, seminars and sponsors that are tailored to their interests.

As in previous years, there will be sessions to prepare for interviews, discuss diversity issues and explore topics in ethics. There will also be ample opportunities to network with other students, schools, alumni and sponsors. The career fair and gala dinner are always culminating highlights at the OP. This is the first year the OP will be held in New Orleans.

In a typical year, when over 300 new Consortium students attend an Orientation, about 80 or more will express interest in finance. The Consortium is still in the process of assembling the Class of '15, as offers for admission go out this month.

For more about OP 2013, go to For more about OP sessions in other cities in past years, see the links below.

Tracy Williams

See also:

CFN:  Getting ready for the Orientation Program, Minneapolis, 2012
CFN:  Consortium OP in Minneapolis, 2011
CFN:  Alumni and the Orientation Program, 2011
CFN:  Consortium OP in Orlando, 2010
CFN:  The MBA Class of '12 in Orlando, 2010
CFN:  Consortium OP in Charlotte, 2009

Tuesday, March 12, 2013

What's the Word from Buffett in 2013?

Buffett's Letter:  Corporate Finance 101
How often have we heard investors and equity analysts say they wish they had the Buffett magic touch? That's Warren Buffett, arguably considered the best, most successful and perhaps most patient investor of all time?  How often have we heard people wonder what special analytical skills Buffett possesses? What is that something (beyond patience and wisdom from experience) he has that myriad others don't have?

The story of Buffett's investment expertise has been told often. Buffett the investment expert operates via the investment vehicle Berkshire Hathaway, Inc.  He has been the investing world's best-known value investor and relies, as he did decades ago, on old-fashioned, traditional investment analysis, the same tools, principles and techniques he picked up when he first encountered the conventions of Graham-Dodd analysis in school. Buffett studied Graham-Dodd principles (thoroughly explained in the 1940 book Security Analysis by David Dodd and Benjamin Graham).

One way to understand Buffett's investment philosophy--his thinking, his approach, his decision-making, his proclivities, his worries, and his management of risk, cash flow and liquidity--is by digesting his annual letter to shareholders. (See 2013 Letter.) Many in the industry look forward to his annual report in the way some look forward to a holiday in the Hamptons.

They count the days until March, and they  guess at what topic he will pontificate on in any given year. Recall Buffett one year, expressing disappointment in the volatility of derivatives, called them "weapons of mass destruction," although he has since employed derivatives in his business operation to a modest extent.

The letter is not a sugar-coated rambling on the performance of business divisions. It's a thoughtful argument in support of decisions the company made and will make to enhance long-term shareholder value--with special emphasis on long-term.

In any given year, the letter explains his philosophy, approach, technique, financial model, and all important decisions. The letter also evaluates bad decisions and lessons learned.  Students and even old-time professionals in finance who read the letter probably learn as much about applied corporate finance and investment management than from any other current source.

Buffett writes the letter in a crisp, down-home style--with bits of humor and little flamboyance. He claims he wants to reach the moms and pops of investing, although it helps to have had a course or two in accounting, some familiarity with corporate-finance principles, and an understanding of economics. Sometimes when the business scenario he describes is complex, it helps to have an MBA.  Still, Buffett does his best to simplify every investment situation he describes, reviews or analyzes and simplify concepts of shareholder value.

Note, too, how Buffett doesn't resort to fads and gimmicks in investing. Berkshire's portfolio includes companies in the following industries:  newspapers, railroads, insurance, and community banks.  He hardly focuses on the latest technology start-up venture, probably because he is attracted to experienced management and proven track records. His letter often attributes the success in some investments to sound, shrewd management of existing operations.

So what was on Buffett's mind this year, when the letter appeared this month?

First, in 2013, he delivered no shock-the-world message, no headline-blazing assessment of the state of capitalism, and no plea to high-frequency traders to stay clear of equity markets. He might have used his forum to do so, but didn't see a need this year.

He offered calming advice on stock investing and explored a few corporate-finance topics in depth, topics that usually get deeper attention and appreciation in an intermediate MBA finance course. Yet he presents his cases in simple, clear language.

What could be more direct than for him to say, as he did this year, that if one invested in a portfolio of stocks at the beginning of the 20th century, he would have generated a return of 17,320% by the year 2000? The comment reflects his confidence and faith in equity markets and his boundless optimism--that one who invested in 1900 was still around in 2000 to reap returns. 

Intrinsic Value

As a prominent value investor, Buffett devotes much space to the concept of "intrinsic value" of business enterprises--whether it's his own Berkshire corporation or the numerous businesses he manages or is considering acquiring.

"Intrinsic value" implies a lot and may mean different things to different investors.  "Intrinsic value" is fundamentally the real value of a business based on expected, sustainable cash flow from operations, based on the value of certain assets, and based on the ability to manage those operations wisely, efficiently, and prudently and invest in their growth.

Buffett explained once again this year that he assesses performance of business lines (and Berkshire as a whole) by evaluating the percentage change in "intrinsic value" vs. percentage changes in the S&P stock index. Investors in Berkshire have an alternative. They can invest in the S&P index or in Berkshire. And he wants them to have a reason to prefer Berkshire over a stock index.

In the absence of a pure computation of intrinsic value, Buffett reminds his readers that he uses "book value" as a proxy for deriving intrinsic value, a grossly under-stated approximation at best. Percentage change in tangible book value is as best as possible a good approximation of percentage change in intrinsic value.

The Insurance Model

This year's letter offers an excellent explanation of the insurance-industry business model. Buffett explains the model as if the industry didn't exist and is starting from scratch.  He rationalizes the insurance company as a behemoth asset manager--not necessarily a risk manager generating premiums and paying out losses.  He shows how profitability dynamics depend on the precision art of pricing premiums vs. risks and the probability of losses.

Intangible Assets

Accounting gurus who gush over discussions of intangible assets (goodwill, e.g.) will fall all over Buffett's 2013 discussions of intangible assets.  He explains how they arise in Berkshire's businesses. He even explains quirks in accounting rules that permit strange, unexpected amortization (expensing) of these assets (which has impact on reported earnings in some subsidiaries). He doesn't indict accounting principles or experts, but provides warnings about how intangibles can distort what might be the true, intrinsic value of a business enterprise.


In an industry that has been declining so fast for so long that nobody disputes the trend, Buffett has decided to invest in newspapers. His letter explains why newspapers will thrive in certain small communities, how they fill a niche in covering local news better than television and the Internet do, and how his portfolio of newspaper ventures will successfully combine online readers with those who will still pay for a copy at the newsstand.


In recent years, since he remarked on derivatives as "weapons of mass destruction," Buffett and Berkshire have warmed up to derivatives, if they are used as risk-management tools and not as arcane, volatile instruments of speculation.  Berkshire inherited derivatives positions in some of its recent acquisitions, and the company has had to manage those exposures. In the latest letter, Buffett acknowledges how derivatives can be used properly to manage financial risk and will be used in the Berkshire organization for that purpose. Other positions will be wound down.

Dividends and Stock Repurchases

Berkshire has a majority stake in numerous companies and has large positions in the stocks of such companies as American Express, IBM, Coca-Cola and Wells Fargo.  It relies on and appreciates the dividends paid out from those stakes. Yet Berkshire and Buffett don't pay a dividend, even when it has amassed substantial amounts of cash.  Buffett had some explaining to do, and he takes delight in having the opportunity to do so. Foremost, he is always on the prowl of using cash on hand to find the next big acquisition, the next "elephant," as he terms it.

He, therefore, goes through a step-by-step example showing when it's appropriate to pay a dividend, when it's appropriate to buy back shares, and when it's right to hoard cash and reinvest in or acquire business operations.  He all but declares that Berkshire will (a) not pay a dividend soon, (b) always consider stock repurchases if, by his calculations, the market under-values Berkshire stock, (c) always lean toward the view that he can reinvest cash in ways better than what the shareholder can do, and (d) will never issue new shares to make acquisitions.

To his credit, he makes the declaration, and then he explains it.  His parenthetical statements on dividends and stock repurchases might have been his under-stated response to the current controversies at Apple, Inc., where major shareholders are currently bickering over what that company should do with billions of dollars of cash it has on hand.

And to his credit, Buffett always reminds his readers he could be wrong, even if he hasn't been most of the time.

Tracy Williams

See also:

CFN: Apple's Stash of Cash, 2012
CFN:  The MBA and the CFA, 2010
CFN:  The Shareholder's Letter at Financial Institutions, 2010
CFN:  Jamie Dimon's Letter to Shareholders at JPMorgan Chase, 2011