Saturday, January 20, 2007

Do MBAs know anything about investing? Not many!

If you offered free hamburgers to anyone with an MBA, you'd run out of them very quickly at Big Company. You'd think that no one stopped after a BA or BS. Amazing how many smart students we have here.

Recently at the water cooler, I asked a very smart and capable friend, with an MBA (in finance?) how she managed her 401k. She told me she switches investments all the time, each year. I said, oh, do you have an asset allocation strategy - are you rebalancing. What's that? I just switch between the funds that are doing well (classic example of hot money chasing past performance).

"oh," I asked, "and how does your approach work?"
"Quite well, I've been making 14% every year."

Now I wouldn't be suprised if she did make 14% this year - the S&P 500 made over 15%. Not bad for active management. But priori years? 2002? Somehow I strongly doubt she made more than a few percent back then. Most people lie or exagerate about their investment experience. Then again, I know what her investment options are and it would have been very unlkely for her to do as well as she claims. Sometimes we project the current year through the past or we ignore losses.

Most interestingly, she knows nothing about Modern Portfolio Theory, investment allocation strategies or diversification You'd think if you paid from $40k - $130k for an MBA, you'd learn how to invest money. Just amazing!

4 comments: said...

Aside from not knowing much about investment allocation she probably also ignores the "cost" of switching. Often there is no "fee" for switching BUT there is a buy-sell spread when moving from one investment option to another. Do this several times a year and you can be "paying" several percent for the privalege of switching so many times a year.

She also probably did a "beardsmore ladies" and included her contributions when looking at how much her account balance had been going up each year!

Anonymous said...

I've been screaming this for years. Also, CPAs are just as bad as MBAs (I am a CPA). I had a very highly regarded co-worker who was doing the same thing as yours (chasing 'hot' funds) and she couldn't figure out why she wasn't making any money. Amazing. It's like a five star chef who can't make mac 'n' cheese.

Jim said...

When I was a law student a number of years ago I knew a guy in my class who used to brag about how well his investments were doing. This guy would invest a little bit of money in a lot of stocks but would only talk about the ones doing well. He was pretty annoying and I have no doubt that this guy was lying about his overall performance.

makingourway said...


I agree with everything you've stated.

I'd hope that she isn't counting her contributions, though I've heard of issues like that for the Beardstown ladies investment club.

Social bragging about investments seems to be a biproduct of the 1960s go go years and too many brown drinks!

Spreads, commissions and various transaction costs certainly whittle things down.

What does suprise me is that so many professionally educated women seem to know less or even be less inclined than men to dabble in finances.

Often, I think this is mildly beneficial for women -- most aren't chasing performance, just letting their money sit and grow.

It seems to me that very few people who actually pay attention to finances actually study financial history, theory, etc.... Most receive their PhD's in investing from MONEY magazine. Imagine if you're doctor received his MD from a pop culture magazine?

Regards, makingourway