Baker Library, Harvard Business School. Image source: Florian Pilz, republished under CC BY 2.0.
A business school degree may get you a job on Wall Street, but it won't do much in terms of making you a better investor (in fact, much of the traditional finance curriculum may well make you a less proficient investor). Take it from this B-school graduate. We asked our analysts for three things you won't learn in business school that will make you a better investor.
Alex Dumortier: Given his exceptional investing track record, you'd think a concept that Berkshire Hathaway CEO Warren Buffett described as "the cornerstone of investment success" might be worth a mention in a course on investments. But the concept of "margin of safety" is seldom, if ever, heard in a business school classroom.
It's a very simple common-sense idea, and as such, you may be tempted to dismiss it in favor of more complicated notions. That would be a mistake -- it's an incredibly powerful concept. Buffett is a tremendous writer; I can do no better than relay his words:
Second, and equally important, we insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success. -- Buffett in Berkshire Hathaway's 1992 shareholder letter
You don't try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin (of safety). When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pound trucks across it. And that same principle works in investing. -- Buffett in The Superinvestors of Graham-and-Doddsville, 1984
For a (much) longer exposition of the idea of margin of safety and its application to different investments, I refer you to chapter 20 of Ben Graham's foundational text, The Intelligent Investor.
Dan Caplinger: One key to investing that doesn't make it into the curriculum in most business schools is the extent to which emotional responses to situations can lead to catastrophically bad decision-making. Whenever there's a substantial amount of money on the line, and people's financial lives hang in the balance, it's challenging to keep your perspective and react rationally to new information, especially when it's negative. Countless studies on behavioral finance have found examples of typical responses that are counterproductive from an investing standpoint, yet occur time and time again.
Perhaps the most obvious example is how mutual fund and ETF investors consistently fall short of the average returns a simple buy-and-hold strategy would provide. Looking at typical investor returns, it's clear that many investors jump into a given fund only after it has enjoyed a period of successful performance, and they often take money out during downturns that therefore lock in losses. It can be hard to do nothing, especially when the news trumpets all kinds of potential danger in the stock market. Yet letting your emotions rule the day is just about the worst thing you can do, and the empirical research backs up the importance of keeping your cool and thinking smart, even in crisis situations.
Tamara Walsh: Patience. It may seem simple, but patience isn't easily taught, and it's not a topic covered in most business school programs today. However, long-term thinking and patience are perhaps the best tools available to investors. Stocks move up and down for many reasons. Having the discipline to wait out pullbacks in share price and not sell into the panic can be difficult. But as history can attest, buying and holding stocks for the long haul often results in outsized gains for investors.
Just look at shares of Apple. Investors who owned Apple stock leading up to the ousting of Steve Jobs in 1985 endured tremendous volatility -- at one point, shares were worth less than a dollar apiece. However, if you had invested $10,000 in 1985 at the split-adjusted price of $0.52 and held those shares through all of the company's many ups and downs, that investment would be worth roughly $2,187,692.30 at yesterday's close.
Nevertheless, people are holding stocks for shorter and shorter periods. In 2012, for example, the average amount of time an investor held a stock was just five days -- down significantly from a holding period of eight years in the 1960s, according to Business Insider. Therefore, the best advice investors won't learn in business school today is to have patience. Buy and hold quality companies for the long haul, and you will likely be handsomely rewarded for that patience.
