The Case For International Students

“Travel is fatal to prejudice, bigotry, and narrow-mindedness, and many of our people need it sorely on these accounts. Broad, wholesome, charitable views of men and things cannot be acquired by vegetating in one little corner of the earth all one’s lifetime.”

Mark Twain,  Innocents Abroad, 1869.

Swept into the miasma of debates over U.S. immigration policy are those who visit the U.S. legitimately, particularly international students. Just as some claim that immigration denies jobs to U.S. citizens, some argue that international students deny places in our colleges and universities to U.S. citizens. If so, then why should we recruit and make accommodations for these students? In particular, why should Darden do this? The short answer is that it sustains our educational mission, it is sound economics, and it is consistent with America’s highest values. Let me explain.

An Overview

At the outset, you must understand that contrary to the claims of the staunchest nativists, attendance by international students hardly constitutes a tidal wave. In the 2011-12 academic year, international students were 3.7% of all students enrolled in U.S. institutions of higher education. [1] In 2012-13, international students comprised 14.2% of all students enrolled in U.S. B-schools. [2]

Since 2002, the volume of people sitting for the Graduate Management Admission Test (GMAT) in the U.S. has declined 15%; all demographic indications are that this trend will continue. However, the volume of international test-takers has more than offset this decline. For instance, Asian GMAT examinees increased 11% over the last five years. Darden saw a 21% increase in international applications this year with just a 1% increase in domestic applications. Student mobility is rising. [3] No surprise: as markets liberalize and aspirations rise, applications by international students (particularly from the emerging economies) have increased to offset the declining application volume from the U.S.

“But,” you may ask, “why should they want to come to the U.S.?” There are over 13,000 institutions in the world that award degrees in business. [4] Applicants enjoy an enormous range of choice. The appeal of American schools is summarized in one word: quality. A passel of metrics point to the prominence of U.S. higher education, including the count of Nobel Laureates, the Shanghai Jiao Tong research rankings, and international b-school league tables. Applicants take notice. The market for university degrees is fairly efficient.

America’s higher education of international students lifts the economy. A recent report estimated that international students contribute $29.8 billion to the U.S. economy—of that, about 28% or $8.4 billion is supported by U.S. sources, but that still leaves a very healthy $21.4 billion net contribution to America’s GDP. [5] A report by NAFSA found that “more than 60% of all international students receive the majority of their funds from personal and family sources. When other sources of foreign funding are included, such as assistance from their home country governments or universities, over 70% of all international students’ primary funding comes from sources outside of the United States.” [6] And this estimate of net benefits probably understates the contribution of foreign students to the U.S. economy because it ignores so-called “multiplier effects”—an increase in GDP greater than the initial spending.

The U.S. has been running consistent deficits in the balance of trade since 1980, owing to large imports of oil and consumer goods. These trade deficits spawned a plethora of problems including a weakening dollar, inflation, flows of “hot money,” capital market volatility, and disputes with trading partners. Educating international students helps to stem the trade deficits–it’s an export of educational services and a smart trade strategy for offsetting what we buy from the world. As one of my colleagues says, “Other countries sell us cars and we train their leaders – which one of these seems like the smarter strategy?”

Virginia is no stranger to these benefits. The NAFSA study reported that in 2012, 15,169 international students contributed $406 million to Virginia’s economy. In 2012, the University of Virginia hosted 2,141 international students, the third highest in the Commonwealth, after Virginia Tech and George Mason Universities. [7] Virginia runs an annual foreign trade deficit of about $3.5 billion. [8] A U.S. Commerce Department report declared “Exports support jobs for Virginia’s workers…Exports sustain thousands of Virginia businesses…Foreign investment creates jobs in Virginia….Virginia depends on world markets.” [9]

The current Governor of Virginia, Robert F. McDonnell, has been a vocal advocate of international outreach. Recently, he said, “In this market, it is mandatory that we continue to expand the presence of international companies in the Commonwealth, as well as explore new export opportunities. That is how we will continue to create good jobs for the citizens of Virginia” (March 7, 2013). Early in his term as Governor, he said, “Over the past six years, 49 percent of new capital investment of projects worked by Virginia has come from international companies. International companies help us create jobs for our citizens and strengthen and diversify Virginia’s economy” (June 10, 2010).

Another Governor of Virginia, Thomas Jefferson, (also our third President, second Vice President, and first Secretary of State) learned from his sojourns outside of the U.S. and actively promoted international engagement, trade, and the exchange of new ideas and technologies. In founding the University of Virginia, he envisioned “…an establishment which I contemplate as the future bulwark of the human mind in this hemisphere” [10] —not county, state, or nation, but hemisphere. From the beginning, he sought a global presence.

International Students at Darden

This brings us to Darden’s place in all this. We recently enrolled Darden’s newest full time MBA graduating class (2015) from 37 countries. And 37% of the 2015s were born outside of the U.S. In the 2012-13 academic year 33% of all Darden students were international (I dislike “foreign” because of its association with a host of prejudices). The vast majority of the top 100 global business schools report international percentages at similar or higher levels.

What motivates Darden to recruit an internationally-diverse class of students?

  • It is right for the students. I challenge any parent: given what you know about the trends in the global economy, would you be satisfied to have your child educated only with people of your own country? The professional world into which American and international students will graduate requires managers and leaders who are globally confident and competent. One learns so much about navigating across borders from studying with internationally-diverse classmates. Our best American applicants demand an internationally diverse classroom and network. They know that the future will require both understanding of and cooperation with other nations.
  • It is right for the companies who recruit our students. Darden’s corporate partners actively look to hire our international students. No wonder. Our analysis shows that the top 15 corporate non-financial recruiters at Darden report an average of 45% of their revenues originating outside of the U.S. America’s business economy is not an island unto itself; it is hugely dependent on global trade. American firms of all sizes must look beyond our borders. Some 46.6% of the sales of the S&P500 companies originate internationally. [11]
  • It is right for our society. International students contribute much more than the measures of student spending indicate. They promote global awareness among American students. They spur innovation and creativity (diversity does this generally). They found companies and create jobs here. Generally, international students carry values that are quite consistent with the heritage of America. These students are optimists, pioneers, and risk-takers who leave their familiar lands, languages, and cultures to strive for a better life. They are drawn to the American Dream as much as many Americans—and the international students help to sustain that dream. Since Darden is financially self-sufficient, it delivers these benefits to society without funding from taxpayers or the University.
  • It can help the native countries of our international students. America spends 1% of its Federal budget on foreign aid and humanitarian assistance. Educating international students is a high-impact complement to such aid. As the saying goes, “Give a man a fish, and he will eat for a day. Teach a man to fish, and he will eat for a lifetime.”
  • It is right for Darden. Our vision for Darden is succinct: “World-class impact and stature.” Our Mission calls us to “improve the world by developing and inspiring responsible leaders and by advancing knowledge.” We want to make a positive impact in the world. Educating international students helps us fulfill our Mission and Vision.

Darden actively supports the aspirations of international students. In 2009, the market for loans to international students froze because of the Global Financial Crisis. International first-year students at Darden were stranded by the freeze because they were unable to finance the second year of their MBA studies. We responded by developing a custom loan program for them. Lending to international students has still not thawed. Darden continues to collaborate with a lender, Discover’s Custom Loan Program. Around two-thirds of our international students [12] borrow some amount under this program—and when they do so, they still have plenty of their own capital at stake because this program limits borrowing to less than the full cost of attendance. Since 2009, Darden’s experience with this custom loan program has been good.

I tell any applicant that borrowing to finance one’s education should be a last resort. Draw down one’s savings: in a previous post I gave evidence that investing in your own human capital yields one of the highest returns you can earn. Next, you should lean on family, friends, spouse’s employment, part-time employment, crowd funding—whatever. Borrowing should be a last resort. We formally counsel international students about the implications of their borrowing, and of the consequences of a failure to service their obligations in timely fashion. The penalties of default are not pretty: damage to credit history, legal exposure, and loss of self-respect.

But in the absence of such a loan program or other sources of financing, Darden would be accessible only to the socio-economic elites in other countries. We want to attract to Darden excellent students regardless of their financial capabilities. This loan program promotes access by the global brightest and best.


I have not seen any rigorous research that affirms the premise with which this post began, that enrollment of international students displaces domestic students. It could be that there is enough slack capacity in American higher education to accommodate all prospective domestic and international students. The premise warrants research—the folks who assert the premise should show proof. But suppose that the premise is true. Then we must make tradeoffs. This post has sketched some of the benefits of educating the international student. And I think those benefits warrant recruiting a globally-diverse class of students.

In 1869, Mark Twain traveled abroad and discovered the benefits that travel can bestow–Darden does a lot to engage our students with the world beyond America. But Twain’s insights apply equally in reverse. Those who host international students win the liberalizing benefits of the inbound travelers. Twain said that these benefits include the acquisition of “broad, wholesome, charitable views.” But our experience at Darden shows that the list of benefits could be extended considerably to include such attributes as keener appreciation for the challenges and opportunities of global engagement; greater global confidence and competence; and quite simply, more “street smarts.” The Darden Community gains a lot from its international students, alumni, faculty, and staff members. Let us celebrate them.

  1. “Open doors: Fast Facts” at []
  2. Source: Association for the Advancement of Collegiate Schools of Business. []
  3. A task force of business school Deans that I chaired produced a report, Globalization of Management Education (AACSB, 2011), which showed that the mobility of students, teachers, and whole institutions is already high and rising still. We are seeing stunning growth of cross-border partnerships among business schools, the development of curricula on globalization, and a serious deepening of the respect for cross-border differences. The world is not “flat;” it is “curved.” Differences in culture, laws, geography, and economies mean that we must produce a new generation of leaders who can navigate through those differences. []
  4. []
  5. “The U.S. support percentage includes funding from a U.S. college or university, the U.S. Government, a U.S. private sponsor or current employment.” From “Economic Impact of International Students,” prepared by the NAFSA Association of International Educators. It is available online at . []
  6. ibid. []
  7. “Open Doors Fact Sheet—Virginia” Institute of International Education, 2012. []
  8. Virginia export data is from U.S. International Trade Administration, Tradestats Express, State Exports Data, Global Patterns of a State’s Exports, , viewed on August 2, 2013. Virginia import data is from U.S. International Trade Administration, “Global Patterns of a State’s Imports,” (Accessed from , viewed on August 2, 2013). []
  9. “Virginia: Exports, Jobs, and Foreign Investment” International Trade Administration, U.S. Department of Commerce, July 2013. []
  10. []
  11. “S&P500 Foreign Sales Edge Up,” Insights, McGraw Hill Financial, Summer 2013, p. 15. []
  12. Discover’s Custom Loan Program is open to domestic students as well. To my knowledge, no domestic students have used this program because of the availability of private and government loans in the U.S. on better terms. []

The Social Contract and Learning at Darden

I welcomed the Class of 2015 to Darden on August 23rd. Here is what I said (approximately, subject to fallible recall):

By now, you’ve been welcomed many times and told how special you are and how you made the right decision to come to Darden. All of that is true. But I’m not going to go on about that.

Instead, let me tell you a story. Once upon a time there were two close competitors. They were similar in virtually all respects: upbringing, natural strengths, environment, etc. But after they reached maturity, their careers diverged at first by a little, then by a lot. One grew in success, prominence and prosperity; the other languished despite repeated attempts to juice up performance with steroids of one kind or another. Scholars who studied the two were puzzled to explain why one succeeded and the other didn’t. Eventually, they settled on an explanation that to this day is influential—they said it was due to differences in the social contract. You see, this story is not about individuals; it is about nations. A social contract defines the ways in which people cooperate for mutual benefit.

The field of development economics is replete with pairwise comparisons that point to the huge impact that institutions, laws, and customs—the tangible manifestations of the social contract—make. Think about the comparison of the two Koreas; the former East and West Germany; Cuba versus Puerto Rico and so on. The social contract is a big determinant of prosperity, not only of nations, but also of the individuals within them.

I bring you that simple story to motivate your reflections on the social contract at Darden: what’s the deal in the classroom among students and between students and faculty members? What should you ask of your professors? What should your professors ask of you? How should students engage with each other? These are frankly tough questions. But the answers to these questions are what make this school truly distinctive and make your time here so transformational.

Why are you spending your time like this? I have spoken with thousands of students over the years, to ask why they came to Darden. Their replies prompt me to say that you’re here because in your personal agenda, it is the top priority; the highest-return investment you can make; the big enchilada. You’re here because there are lessons to learn here that you cannot learn elsewhere. This isn’t just getting information (names, dates, formulas)—you can get that stuff online and usually for free; you’re here to get something more. And that’s why I think you’ve made the right decision to come here and why I think it is the most important thing you can do with your life for the next 21 months. If you will engage with faculty, staff, and each other in certain ways, you will learn a new way of learning, a way that is sharply different from the conventional experiences you’ve had before, a way that will rock your world, and a way that will guide you for all time. That new way of learning is the focus of the social contract at Darden.

The new way of learning entails discovering things for yourself; making sense out of ambiguous business situations and usually conflicting bits of information. Life poses a host of questions and very few answers. Getting on with life means figuring things out for your self, making your own meaning about things. Accordingly, the way we teach is by helping students learn on their own. We do so not by giving answers, but by asking questions. How we teach is what we teach. This is an incredibly powerful approach and is as old as Confucius, Buddha, Socrates, Jesus, Hillel, and Mohammed. Learning takes place when you find out for yourself. Professors are there to question, challenge, nudge, probe, and excite you. When a student asked Socrates a question, Socrates usually replied with a question. Darden’s professors are likely to do so too. This will frustrate you; it will exhaust you; and it will stretch you. All of this is strengthening you for your unique destiny.

Thomas Jefferson founded this University because, in part, he wanted to advance “useful knowledge.” Like him, American culture tends to be practical, entrepreneurial, and prone to experiment with ideas. It is a culture of perpetual ferment. Americans tend not to enshrine knowledge and theories. The body of knowledge is changing at a rapid rate. What matters is mastering a method of finding out and keeping up. The process of relentless questioning and discussion teaches you this method.

The social contract at Darden requires that you trust the process. Trust that the questioning by the faculty is leading you somewhere. They want to help. And you came to study with the world’s best teachers. So, form a relationship with them that feeds your development. Don’t look for grandiose speeches, easy answers, or compliments; look for wise and candid feedback. Accept and admire professors who demand your very best. By the way, each and every one of you is capable of excellent work, so don’t doubt for a minute that you can give the faculty what amounts to “the very best.”

Another implication of the social contract at Darden has to do with mindfulness. Once, I was at a Las Vegas casino, where I was doing some scholarly research. There, hanging over the roulette table was a sign that said, “You must be present to win.” You must be present to win. This meant that you could not place your bets and then leave the table to get a drink or see a friend, and return later to pick up your winnings. You had to be present when the winnings were declared, in order to get them. So it is at Darden. You must be present to win.

What does “being present” mean? It means being mindful: self-aware of your state of mind and your impact on others. And it means being socially aware of what’s going on around you. You can’t “zone out” and get the rich transformational experience that Darden offers. Mindfulness is one of the top attributes of high-performing leaders. So this is good practice for your future. When I describe Darden as a “high touch” community, I’m referring to a community where students, faculty, and staff are present and engaged actively in the learning process. Being present is part of the social contract at Darden.

Learning at Darden isn’t a solo experience. If you don’t understand something, don’t be afraid to ask another student. And if you have mastered a subject, go out of your way to help others. Being present and engaging one another means doing your assignments not just for yourself but for the sake of your learning team; it means coming to class prepared and participating in discussions; it means supporting the Honor Code, being active in clubs, and lending leadership when our community needs it.

If you are present and engaged, you’ll discover quickly that Darden is a very diverse community. Diversity matters a lot to us because it promotes great learning experiences; it prepares you for the world you are entering; it creates a richer intellectual environment; it creates a community that our recruiters, alumni, and public expect; and it helps to fulfill our mission, to develop and inspire responsible leaders. A community that values diversity needs you to embrace diversity.

Get out of your comfort zone. Find some classmates who are very different from yourself—a different race, nationality, sexual orientation, or gender for instance—and make a serious effort to see the world through their eyes. Befriend those people. Share the Darden experience with them.

If you find yourself drawn constantly to a few classmates just like yourself, you aren’t really present. If you don’t test your assumptions about people different from yourself, you aren’t really present. If at the end of two years, your comfort zone is no larger than it is today, you have not been really present.

The social contract at Darden calls you to perform with Honor. The Honor Code at UVA is very serious. We expect your work on tests and papers to be an independent demonstration of your mastery unless you explicitly acknowledge the contributions of others. The Honor Code helps to create a community of trust in which virtually all exams are given on a take-home basis. Do not lie, cheat, steal, or plagiarize. Violations at Darden have been rare but when they occur, the consequence is expulsion. Don’t even think about testing the limits.

Unlike many other schools and universities you may know, Darden is not an ivory tower, an isolated academic world. We actively engage the profession of business; you will interact with our alums; we bring thousands of executives to grounds here each year; we immerse you in interactions with companies and executives. Darden is part of one of the great research universities of the world. And we live in one of the most desirable cities.

I ask you to assume that in dealing with those companies, communities, and people, you are always on stage. The impressions about Darden flow from the slightest actions of yours. All of us depend on the actions of each other. You are Darden’s brand. The social contract at Darden asks you to live the brand.

In conclusion, you’re here to transform yourselves. And you’ve come to the right place. Take these two years to find your true vocation, to shape a vision, and to learn the tools and concepts to enable you to have impact in the world. Sustain the social contract and you will fulfill the promise I made for a truly transformational experience:

1. Put on a new way of learning: self-discovery.

2. Trust the process.

3. Be present.

4. Embrace diversity.

5. Work with Honor.

6. Live the brand.

I wish you the very best in your time here at Darden!

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The Problem with Piece-Wise Learning

I got it one piece at a time
And it didn’t cost me a dime
You’ll know it’s me when I come through your town
I’m gonna ride around in style
I’m gonna drive everybody wild
‘Cause I’ll have the only one there is around.

- Johnny Cash, “One Piece At A Time”

I’ve heard some talk lately about how technology will disaggregate higher education. The vision is that the likes of Khan Academy and Coursera will allow students to pick and choose courses and learning experiences to construct their own higher education—thus, it is asked, “why do we need colleges, universities, and dedicated faculties?” The Valhalla of limitless choice and student-driven learning presages an education built “piece-wise:” a little of this and a little of that pulled from a vast smorgasbord of providers at little or no cost to the student. What could possibly be wrong with that?

Johnny Cash’s classic song gives us the answer; but more about that in a moment. At issue here is the value of structure and system in higher education, such as distributional requirements, a major, special fields, a final essay, and the value of advising and student support. All these elements promote breadth and depth. A great education has a comprehensive vision about what an educated person should be or be able to do. At the heart of this comprehensive vision should be a commitment to systematic learning: one should know a little about a lot (breadth) and in one or more areas, should know a lot about a little (depth).

A piece-wise education doesn’t prepare you for life, and especially for professional life. You don’t stay long enough in one field to gain some deep insights. And you don’t gain the systematic breadth to help you connect dots across different disciplines. The partner in charge of recruiting for a leading management consulting firm once told me that he finds liberally-trained graduates “so much more interesting:” able to express themselves well, able to talk on many subjects, more creative, more self-confident in uncertain contexts, and so on. But there is more…

· A piece-wise education can be less than the sum of its parts. There is a very strong synergy among fields and subjects. An understanding of economics benefits from knowledge of math; an understanding of politics benefits from knowledge of economics; finance benefits from accounting; marketing benefits from psychology and anthropology; and so on. But this can work in reverse too: piece-wise learning might generate misunderstanding of related fields and a tendency to generalize from a very narrow knowledge base. As the saying goes, to a small child with a hammer, everything looks like a nail. Do we want medical doctors who know everything about pharmacology and nothing of surgery? Do we want pilots who know avionics but not aerodynamics? Do we want bankers who know all about financial engineering but not about ethics? Solutions to problems come from what you know. To the piece-wise educated, solutions to problems can seem deceptively simple. The danger is that those same people will make decisions on which our lives depend.

· You don’t know what you don’t know. A great education should cast daylight sufficiently far to instill respect for the sheer immensity of knowledge and of the pell-mell pace with which it is expanding. With piece-wise learning, you will see as far as your personal horizon, with no ken of what lies beyond. What the world needs is leaders who have a vision that spans great distances, who have the wisdom to call for help because they have an inkling that they don’t know it all, and who have the capability to talk with experts in a probing and critical way. (See my earlier post, “Why do we need academic degrees?)

· You must own it; they won’t. The bland assurances of any provider—be it a college, non-profit university, a for-profit, or free online service—won’t protect you against getting a piece-wise education. You must want the systematic breadth and depth in order to get it. The failure of some schools to provide a more systematic education is saddening and inconsistent with their mission to society. Some schools under-invest in advising, tutoring, mentoring, and career counseling. In those settings, you’re faced with a choice: chart your own systematic breadth and depth, or risk piece-wise confusion, frustration, and ultimate exit. The 64% dropout rate at for-profit universities is quite high and dwarfed only by the 90% dropout rate for Massive Open Online Courses (MOOCs).

· Too much dessert and not enough broccoli. Students who simply follow their appetites will eventually find some educational candy: courses that may gratify an immediate interest but don’t really build one’s capabilities. Like a healthy diet, a great education consists of a balance of intellectual nutrition. Piece-wise learning can stoke the kind of consumerism that we see at the local food mall, producing the educational equivalent of obesity, hypertension, and bad teeth. Eat your vegetables. They are good for you. Trust me.

Or, trust Johnny Cash. His song, “One Piece At A Time,” tells the story of a worker on a Cadillac assembly line who yearns to own one of those cars. So, he swipes parts over the course of 20 years, to the point where he is able to put together his own Caddy. Because the models kept changing year-to-year, the resulting car was a mish-mash:

Now, up to now my plan went all right
‘Til we tried to put it all together one night
And that’s when we noticed that something was definitely wrong….

The back end looked kinda funny too
But we put it together and when we got thru
Well, that’s when we noticed that we only had one tail-fin

About that time my wife walked out
And I could see in her eyes that she had her doubts
But she opened the door and said "Honey, take me for a spin."
So we drove up town just to get the tags
And I headed her right on down main drag
I could hear everybody laughin’ for blocks around

Johnny Cash’s song is a cautionary tale for piece-wise learners. It reminds us why structure matters: it promotes breadth, depth, and consistency of the pieces of learning that will form a whole greater than the sum of the parts.

Let me be clear that there may be a role for piece-wise learning for almost everyone. It could be that you want to fill a gap in your understanding that remains from a formal degree program. Or maybe the world has changed since you got your degree and you need a “tune up” in your knowledge to stay relevant. Or you got a promotion that takes you out of your comfort zone and you need some targeted learning to prepare you for the next level. For instance, non-degree executive education programs are enormously valuable in filling such needs. But my point is that piece-wise learning is a complement, not a substitute, for a broad and deep systematic program of study.

My advice to students anywhere is to consider the great importance of systematic learning. Think critically about the system of study offered at any particular school. Commit yourselves to as rigorous a course of studies as you can stand; ask for thoughtful and wise advice about selecting courses; aim for breadth and depth; and eat your vegetables. When in doubt, listen to Johnny Cash’s song.

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Advice to the Summer Intern: Making a Graceful Exit

For our students with summer internships, the end is in view. MBA programs resume soon. Interns will work for just a few more weeks, and then return to school. Thus, it’s the annual moment for me to offer some advice to interns about to finish their summer jobs.

Most summer interns want a full-time offer. In recent years, about 60% of interns from Darden have received offers of permanent employment from their summer jobs. As my previous posts show, there is a range of things one can do to improve the odds of getting an offer:

A. Actually ask for the job. Too many summer interns simply don’t “close the sale” (see this.)

B. Become known. “Lean in,” in Sheryl Sandberg’s parlance. Too many summer interns lean back and fade out (see this.)

C. Finish at a sprint; don’t coast to the end. Research suggests that the most recent perceptions are very influential to decision-makers. Even if you’re finished with your summer project, walk around and volunteer to help anyone else (see this.)

D. Quell any sense of entitlement; you must earn the offer. In most settings, arrogance damages, rather than strengthens, career prospects (see this.)

No doubt, such offers bring huge relief to the student: regardless of the recruiting dance in the year ahead, you’ve got a backstop.

But what about the others who came back without an offer? Here’s some advice for you.

1. Take stock and get grounded. I would guess that most interns who didn’t get an offer aren’t totally surprised. If you are surprised, that’s an even more important reason to get grounded. Maybe the business was in trouble and cutting back on hiring. Or it was an insane product, a toxic boss, or the Customer from Hell. Or maybe it was an accident: you dropped a bowl of hollandaise in the CEO’s lap at the annual meeting. Or perhaps it was the most simple of all: you just aren’t cut out for that kind of work. Before you leave, it is important to get candid feedback, even though it may be difficult to ask for and receive it. If you don’t, you’ll always wonder. And the absence of insights may hamper your ability to plan the next steps.

2. Take the high road. Don’t weep, pout, plead, or bargain aggressively. Under no circumstances, should you slam the door on the way out. To the extent you can, make a lap around the business from the executives to your supervisor, to your peers, and the administrative assistants: “Thank you for the opportunity to work with you. I wish it had worked out; perhaps our paths will cross again; I’d be glad to stay in touch. And best of luck to you going forward.” A gift of a box of cookies or chocolates for that co-worker who made an extra effort to help you is a grand gesture. The high road exit expresses grace, dignity, and self-confidence. If you stay in the same industry, you may well run into your co-workers again; the high road exit actually gives you a “bridge” with which to resume a conversation. And occasionally, the high road prompts a reversal: weeks later you may get a call “Um…we’ve changed our mind; would you work for us?”

3. Get perspective. Talk through the experience with a mentor, your partner, or wise friends. The key questions should be “What happened?” “Why did that job matter to you?” “What can you learn from this?” and “What’s Next?” A coach or career counselor can lend even more structure to the reflective process. Getting perspective is important for your peace of mind. And it may help you to answer questions from friends and other employers about why you didn’t get an offer from your internship.

4. Find acceptance: it is what it is. Move on. Later you may well conclude that it was a blessing in disguise. And never forget that your worth is infinitely greater than any offer, job title, or paycheck.

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What Business Are You In?

I’ve seen many organizations lose their way because of a failure to know what they were about. My study of failed mergers and acquisitions carries that as a basic theme. To know what your firm is about is to be able to answer crisply questions about mission, vision, values, strategy and positioning—perhaps the most common of such questions is, “What business are you in?”

I’m least impressed with answers that have to do with things (such as “plastics” as the father said to Dustin Hoffman in The Graduate.) Rather, the best answers have to do with activities.

An exemplar of the good kind of answers is William H. Neukom, who served as the lead lawyer for Microsoft for 24 years, and then as CEO of the San Francisco Giants for three years. The other day, I heard him explain the business that the Giants are in. He could have simply said, “baseball.” Instead, he offered the following:

· We are in the entertainment business. We compete with any other way that people spend discretionary time.

· We are in the talent management business. Recruiting, developing, and measuring talent are crucial to our success.

· We are in the education business. Baseball is a very subtle game. Those who understand the subtleties of the game are in it for life.

· We are in the customer service business. We have to offer a safe, comfortable, and welcoming venue.

· We are in the community service business. Baseball can’t be about a few millionaires playing ball down on a diamond; we have to reach out to the community and help even the marginalized people in society to engage with our sport.

· We are stewards of a quasi-public trust. Our constituents are our colleagues, our customers, our fans, and our communities.

And I suspect that given more time, he could extend the list further.

Neukom’s definition of the Giants’ “business” illustrates the sheer complexity of that enterprise: the Giants must be good at many things, not just one thing; the Giants serve many different stakeholders; and the elements of the “business” form a system that support one another—neglect one and the others will suffer.

This definition of the Giants’ business reminded me of a classic article, by Ted Levitt, written in 1960. He asked why railroads stagnated in mid-20th Century:

The railroads did not stop growing because the need for passenger and freight transportation declined. That grew. The railroads are in trouble today not because that need was filled by others (cars, trucks, airplanes, and even telephones) but because it was not filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry incorrectly was that they were railroad oriented instead of transportation oriented; they were product oriented instead of customer oriented….

He concluded,

…the entire corporation must be viewed as a customer-creating and customer-satisfying organism. Management must think of itself not as producing products but as providing customer-creating value satisfactions. It must push this idea (and everything it means and requires) into every nook and cranny of the organization. It has to do this continuously and with the kind of flair that excites and stimulates the people in it.

Today, the view of business leaders like Bill Neukom expands the sphere of value creation beyond customers to include all the stakeholders of the firm. Neukom’s reply to “what business are you in” is a foundational lesson for enterprise leaders: think deeply about whom you serve, and how. Like the Giants, healthy enterprises probably need to be good at many things, not just one thing; they serve many different stakeholders; and the elements of their service form a mutually-supportive system that support one another. But Neukom and Levitt would probably agree on the primacy of defining one’s “business.” Get that right, and other good things follow.

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A New Normal? Or Just More ‘New Era’ Thinking?

“Laissez-faire is dead…The all-powerful market that always knows best is dead.” (September 2008, Nicholas Sarkozy)

This is not a recovery, this is an “emotional, social, and economic reset.” (November 6, 2008, Jeffrey Immelt)

“…a nagging fear that America’s decline is inevitable…the next generation must lower its sights.” (January 20, 2009, Barack Obama,)

“The bubble has burst…this is a once-in-a-lifetime economic event…a fundamental economic reset.” (February 2009, Steven Ballmer)

“the new normal” and “potent cocktail – a self-reinforcing mix of De-leveraging, De-globalization, and Re-regulation… that disrupt the normal functioning of markets and the global economy.” (May 2009, Mohamed El-Erian)

On their face, recent events would seem to confirm what these eminent seers declared back in 2008 and 2009: capitalism, particularly in the developed economies, has descended into a “new normal” considerably less appealing that the buoyancy of the 50 years following World War II. Some straws in the wind:

· The 2010 book, The Great Reset, by Richard Florida is a prominent expression of the view that we are in a “new normal.” In essence, he argues that the Global Financial Crisis has triggered a reaction to the pervious era of unbridled consumerism, aggressive use of debt financing, winner-take-all corporate management, and so on. Though Florida does not court embarrassment by making an economic forecast on which an investor could act, he does argue that this reaction will be a long period of austerity not unlike the Great Depression (1931-1940) or the Long Depression (1873-1896) in American History.

· Prominent economists such as Robert Gordon, Tyler Cowen, Carmen Reinhart, and Kenneth Rogoff suggest that America may be in for a long slog of slow growth—I summarized their messages in a recent blog post.

· John Boehner, Speaker of the House, gave a speech last week in which he mourned the “new normal” economy that America faces and advocated every business and person to create wealth.

· At the other end of the political spectrum, Senator Bernie Sanders decried the “new normal” and wrote in the Guardian that “We must not be content with an economic reality in which the middle class of this country continues to disappear, poverty is near an all-time high and the gap between the very rich and everyone else grows wider and wider.”

· Trustees of pension plans and charitable endowments foresee mid-single digit returns on a diversified portfolio of investments in the future. This prompts them to propose cutting the typical investment draw rate, 4.5%, to something much lower, saying “get used to it; it’s a new normal.”

· The following graph shows the mentions of “new normal” in periodicals in recent years. Plainly, “new normal” is a meme, an idea that appeared with the collapse of the Internet bubble in 2001 and really surged in 2009. By now, it is an idea firmly rooted in the public consciousness.


Readers of this blog have seen my agreement that our recovery from the Great Recession will be slow. We are likely to return to higher employment that we experienced before the Global Financial Crisis only in the latter part of this decade. Certainly, our slow recovery to date is consistent with Richard Florida’s forecast in 2009.

I don’t have a crystal ball; and anyone who claims to have a crystal ball is lying. I do worry a bit when there is so much unanimity in a diverse population. Perhaps the unanimity is proof of “new era” thinking and a signal that conditions are about to change.

In a recent post, I highlighted “new era” thinking as a very important foundation of a market bubble—we can generalize “new era” thinking to be an attribute of major economic turning points, in the opposite direction. Research documents the tendency of markets to “overshoot” or overreact to changes in the economic fundamentals. For instance, retail investors tend to sell out well after the “smart money” and after prices have subsided to a level consistent with rational valuation; this added selling causes markets to “undershoot,” driving prices below levels consistent with a realistic outlook. There is a similar tendency for retail investors to buy in during the late stages of an economic expansion.

I wonder whether the ubiquity and persistence of the “new normal” meme signal a “market top” for this idea. In recent years, Jeremy Grantham, a iconic investment manager, has been almost Cassandra-like in warning about the perils of the “new normal.” But in his most recent investment letter, he acknowledges “two trends that might just save our bacon.” His dour letter won’t prompt dancing in the streets, but it certainly suggests a sea-change.

What are business leaders and investors to do with the concept of the “new normal”? Here are some suggestions:

First, challenge anyone who uses the phrase (your chief of forecasting, perhaps) to define it in any rigorous way. I’ve tried this with a cross-section of business practitioners and gotten some pretty mushy replies. Here’s the best I can say: a “reset” embodies the consciousness that this time it really is “different.” The “new normal” as triggered by a “reset” is a downward step-change in welfare, outlook, and self-confidence. A “reset” is transformational: big, costly, enduring, pervasive, and unanticipated.

The power of “new normal” and “reset” may be their usefulness to leaders in mobilizing constituencies at both ends of the political spectrum. The Left has harnessed this meme to motivate a stimulus funding program, health care reform, and re-regulation of the financial services sector. On the Right, the meme underpins a spirit of regime change displayed by Tea Party and Libertarian candidates who argue that most of what the government does is unaffordable now and in the years ahead. Thus, the meme has influence in the way that Humpty-Dumpty told Alice in Through the Looking-Glass:

‘When I use a word,’ Humpty Dumpty said, in a rather scornful tone,’ it means just what I choose it to mean, neither more nor less.’

‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’

‘The question is,’ said Humpty Dumpty, ‘which is to be master – that’s all.’

Next, it is worth asking, “Is this it? Are we in a “reset”?” Without a rigorous definition, how can we tell? The proponents argue that we are in a reset because it started with a bank panic, like other resets. It is global in scope. There is clear job destruction. The recovery is slow and is accompanied with a big transformation in various industries, such as housing and finance.

But on the other side are some possible objections. We have seen many bank panics and relatively few “resets.” The appearance of a panic in 2008 is not a perfect predictor of the next reset. Though the Global Financial Crisis rippled around the world, some regions (China, India, Brazil) remained buoyant for a considerable time. Though housing and finance were badly damaged in the crisis, sectors of the economy such as energy and health care showed relatively little harm. Though unemployment is worse than in many previous recessions, it remains a matter of considerable debate as to whether the unemployment is structural in nature, or purely cyclical. Deleveraging always occurs after a financial crisis. Anyway, when hasn’t the U.S. economy been in some stage of transformation?

Third, one should ask, “Is this “reset” like other resets?” The following table offers a profile that so far does not look much like the Great Depression, Long Depression, or the depression of the 1890s. The recent crisis and recession stand out for the very slow recovery, but not for the depth of the damage.



It’s a stretch to imply that the present “new normal” compares to earlier depressions. The current situation lacks the pervasiveness of antecedents. Nevada and the city of Detroit are devastated; Utah and Washington D.C. are not. Greece, Iceland, and Ireland are plainly in deep distress, but China and India have been relatively buoyant. Industries such as housing, financial services, and print media were hurting, but oil & gas, health care, agribusiness, and information technology barely broke stride.

The present social and political environment doesn’t compare well to historical examples. We have had rallies in Washington, Occupy Wall Street, and Tea Party populism, but have yet to see a populist presidential hopeful on the order of William Jennings Bryan (1896), the demagoguery of Huey Long and Father Coughlin (1930s), Coxey’s Army (1894), the Bonus Army (1932), the violence of the steel and Pullman strikes (1894) or the Molly Maguires (1875), and long bread lines of the Great Depression. Such kinds of events may yet appear in this cycle, but until they do, how can one be certain that we are now in “reset”? Pundits hopefully suggest that a political regime change is imminent in 2014 or 2016, though such is not unusual for the second term of a Presidential administration.

To be sure, the present high unemployment, low growth, fragility of the recovery, and fiscal deficits of the U.S. are serious, unsustainable, and unacceptable. They could unravel into another correction and serious social unrest if not reversed soon. In this sense, perhaps the events of 2007-2010 could better be labeled a “preset,” a precursor to a much bigger realignment that awaits the U.S. economy if fundamental problems remain unaddressed.

Fourth, one should ask, “If we are in a “new normal” triggered by a “reset,” when did it start? Most pundits reply that the “new normal” was triggered by the Global Financial Crisis of 2008-2009. But there are very plausible alternatives:

o 2001? Internet bubble pops, Enron, 9/11.

o 1989? Collapse of Soviet sphere; “end of history.”

o 1973? First oil shock.

o 1971? Abandonment of Bretton Woods system.

Economic historians some years from now will earn their pay trying to parse the actual onset of the “new normal” from the alternatives. Suffice it to say, if we can’t pinpoint the beginning, how can we be so sure of the ending, or even the very existence of the “new normal”?

Finally, one should fight acceptance of the “new normal.” Some folks I’ve met express a weariness with the slowness of the recovery: “New normal? So be it.” But this is defeatism. It is in no one’s interest for America to sustain the “new normal” for very long. James Pethokoukis argued this in a blog :

So what to do? One option is acceptance. Accept that we will never fully close the growth gap or income gap or jobs gap. Accept that unemployment will never return to the levels of the Bush and Clinton years. It’s time to move on and be grateful that America avoided an outright depression and isn’t suffering recessionary relapse as Europe is. The Dow and S&P 500 are making records, and home prices are again rising. Slow and steady is better than bubbles and busts, right? Forward!

The other option is defiance. Refuse to embrace the “new normal” reality. Refuse to lower expectations of what America can be. As Larry Kudlow likes to say, “Growth, growth, growth!”

Next November 14 and 15, Darden will host the sixth annual University of Virginia Investing Conference. The theme of the conference is “Finding Opportunity in an Unpredictable World”—this confronts the mentality of the “new normal.” Where can asset managers find attractive returns?

Industry experts from around the world, hosted by Darden’s faculty, will probe innovations and investment ideas that could help the decision-maker respond proactively to current conditions.


Speakers include:

Registrations for the conference may now be made. Reserve your seat today and gain some insights to deal with the “new normal.”

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A New Bubble? An Old Meme?

“A meme (pron.: /_’miːm/; meem) is “an idea, behavior, or style that spreads from person to person within a culture.”A meme acts as a unit for carrying cultural ideas, symbols, or practices that can be transmitted from one mind to another through writing, speech, gestures, rituals, or other imitable phenomena. Supporters of the concept regard memes as cultural analogues to genes in that they self-replicate, mutate, and respond to selective pressures.”

- Wikipedia

As my last couple of posts on the subject of a “market bubble” suggest, I harbor doubts about the justification for the buoyant markets (see this)—and at the same time, I emphasize that the definition of “bubble” is murky (see this); thus, how would we know a bubble when we see it?

I’m in New York today and convened a roundtable discussion of investment management professionals for Darden’s new Center for Asset Management. There, the attendees discounted the notion that the U.S. markets are in the early stage of a bubble. They pointed out that the correlation between GDP growth and the stock market has never been high, that the price/earnings multiples remain at a reasonable level, and that investors are still “under-risked” as indicated by the historically high percentage of assets held in the form of cash. The problem is that the world is awash in liquidity and returns are low because of financial repression by the central banks.

If this is true, then why is the concept of a “market bubble” on anyone’s mind? My guess is that it has been burned into our collective consciousness by recent experience. Mind you, the notion of a “market bubble” has been around since at least 1637 and the bursting of the Tulip Mania, or since 1720, and the collapse of the South Sea Bubble and the Mississippi Bubble. The longer history of bubbles is recounted in Charles Kindleberger’s book, Mania Panics, and Crashes and in Charles Mackay’s book, Extraordinary Popular Delusions and the Madness of Crowds—these are worthy readings for professionals in finance and investing.

But for much of the post-World War II era, the fear of market bubbles disappeared. Then, at the end of the 20th Century, the “market bubble” re-entered the collective consciousness. The following graph depicts the number of mentions per year of either of two phrases, “market bubble” or “economic bubble” as they appeared in newspapers and periodicals.


These data are drawn from Factiva with the help of Darden’s Reference Librarian, Susan Norrissey.

Note that the volume of references was virtually nil from 1978 to 1991. Then the number rose in the wake of the Tequila Crisis (1994), the Asian Financial Crisis (1997), the Russian Flu (1998), and the dot-com bubble (1997-2000) and its bust (2000). It is not surprising to see the lag between these events and subsequent increases in the number of mentions; as I have discussed in previous posts, it is difficult to make sense of a bubble and writers will continue to try as long as it sells copy. What is remarkable is that the concept of “market bubble” has remained an object of strong interest for so long.

My point is to suggest that “market bubble” is not just a financial concept. It has attained the status of a meme, “a unit for carrying cultural ideas, symbols, or practices…” And the graph suggests that it gained that status well before the Global Financial Crisis. We are a society that carries bubbles in our heads. And for good reason: the cascade of financial crises and panics over the past 20 years has taught us painful lessons.

These are uncertain times for investors. The forthcoming University of Virginia Investing Conference, November 14-15, 2013 at Darden will consider “Finding Opportunity in an Unpredictable World.” See the list of provocative speakers and sessions. Mark your calendar.

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My advice at Graduation 2013: Hang on, hang in, and make a difference

[Here are my remarks for Darden’s 2013 graduation ceremony. I foreshortened my talk a bit to help avoid some approaching rain. What follows is the full message.]

“Never confuse movement with action.” – Ernest Hemingway

Today’s ceremony is an historic event in that we honor the first graduating class of Darden’s Global Executive MBA program. These students traveled far to come to Darden; they traveled far during the program; and they will travel far as new MBA graduates. This prompts the following reflection.

This graduation season, the media will report a range of speeches by famous people, one common theme of which will be to exhort the graduating students to “move out, move away, and move on”—the notion being that they’ve had enough time with the cloistered academic life and that more growth awaits them out in the real world. It’s hard to argue with that—except that “move out, move away, move on” too easily becomes the mantra for professional life in general. Therefore, I choose to take the contrary view this season, and urge you to embark on a professional life where you “hang on, hang in there, and make a difference.” Let me tell you why.

The evidence is growing that professional life in business is not just mobile, it is getting a bit footloose:

  • It is said that today’s MBA graduates are more like entrepreneurs than true employees, and that they are more transactional than relational and therefore more prone to move around frequently. There’s an urban legend that the tenure of the MBA’s job with his or her first employer is short, about 18 months. I haven’t found any rigorous research to support this, but conversations with corporate recruiters seem to affirm this urban legend. You are not much wiser after 18 months than you were after your day of graduation. Nor are you much more valuable to the business community. In one of my blogs, I urged MBA students to think about making a commitment to stay awhile with their first employer—I called it the “five-year hitch.” I’m pleased to say that Darden graduates do stay longer with their first employer: only 17 percent of Darden graduates changed employers within 18 months. [1] And 41 percent of Darden graduates stay with their first employer for five years or more.
  • The behavior of many other MBA graduates mirrors the broader society. Surveys find that 61% of all employees are open to or are actively searching for a new job. And the median tenure of all job-holders is 4.4 years.
  • The median tenure of CEOs of the S&P 500 companies is even shorter: 4 years. In most industries, that’s a fraction of the time it will take to make a beneficial impact. And it’s barely enough time to learn the nuances of a complicated position, such as leader or general manager.
  • Then there is the statistic from census data in the U.S. that 13% of all households change address each year. Such mobility is even greater among 25 to 34 year-olds: 21% per year—this means that one out of five of you will move each year. Compared internationally, these rates of movement are high. America is an extraordinarily mobile society. Such movement is costly to communities, businesses, and charitable organizations, not least because your leadership is needed to tackle the problems and seize the opportunities that society faces. This contributes to a decline in social capital described by Robert Putnam in his book, Bowling Alone. Putnam wrote,

    “Television, two-career families, suburban sprawl, generational changes in values–these and other changes in American society have meant that fewer and fewer of us find that the League of Women Voters, or the United Way, or the Shriners, or the monthly bridge club, or even a Sunday picnic with friends fits the way we have come to live. Our growing social-capital deficit threatens educational performance, safe neighborhoods, equitable tax collection, democratic responsiveness, everyday honesty, and even our health and happiness.”

All of this movement is not lost on humorists. A journalist friend of mine, Bill Henry, once wrote a farewell column as he was leaving Boston to go to New York to take up a job with a big magazine. He said something to the effect of “When you’re young and in your twenties, you should live in Boston and pretend you’re still a student. When you’re in your thirties, you should live in New York and prove that you can make it in the big time. When you’re in your forties, you should move to Washington D.C. and pay your dues to society. And when you’re in your fifties, you should move to Los Angeles and pretend you’re a student all over again.”

Consider the alternative. George David, Darden MBA Class of 1967, worked for United Technologies Corporation for 23 years. He served as UTC’s CEO for 14 years. The year he retired, he came to Darden and spoke to our community. His message was that commitment to an enterprise and continuity of leadership are hugely valuable—they produce high levels of domain knowledge, which becomes the foundation for high performance. If domain knowledge matters, then keeping planted in one sphere is very important.

In contrast, George David’s chief competitor was Jack Welch, CEO of General Electric. Welch believed in the theory of the “best available athlete” as the criterion to fill any managerial position. For instance, in picking someone to run GE’s locomotive business, Welch might pick one who had been running operations in the light bulbs or medical equipment. His presumption was that if you’ve seen one operation, you’ve seen ‘em all.

George David had a different view. He believed in appointing managers who knew the business best. For him, that meant recruiting managerial talent carefully and then growing it over long periods in whatever business the candidates might be, such as helicopters, air conditioners, or elevators. The interesting thing is that Jack Welch’s successor, Jeffrey Immelt, has since disavowed the “best available athlete” theory.

Among Darden’s alums, I see some great examples of what it means to “Hang on, hang in, and make a difference.”

  • Paul Hamaguchi (Darden MBA 1970) lives in Tokyo, Japan, and is CEO of Higetu Shoyu Company, Ltd., a 400-year old producer of soy sauce. Paul has worked with that company since 1979.
  • Gordon Crawford (Darden MBA 1971) lives in Los Angeles where he has worked as a securities analyst and portfolio manager for Capital Research and Management for 40 years. Gordy rose to be a top expert in media and entertainment. He served as Chairman of Southern California Public Radio and Vice-Chairman of the Nature Conservancy.
  • Lem Lewis MBA 1971, was the first African American to graduate from Darden. He rose to EVP and CFO Landmark Communications in Norfolk and worked for nearly three decades with the company. Today he serves the community with his leadership. He’s on various charitable boards, including the Darden School Foundation. And he chaired the board of the Federal Reserve Bank of Richmond.
  • Elizabeth Lynch, MBA 1984, worked for Morgan Stanley for 22 years, eventually retiring as Global Chief Operating Officer of their Equities Research business. She has been a wonderful supporter of Darden and told the students in General Managers Taking Action, “Do new MBAs get it? I want to see commitment to culture, loyalty, and learning. Always be wary of the person who’s had three jobs in five years.”

My point is that these people had huge impact in their work and lives through long-term dedication to one organization. They hung on, hung in, and had an impact. Their ability to gain senior leadership probably had something to do with hanging on. About two-thirds of all CEOs of the S&P 500 companies were internal appointments; and on average, they spent 12.8 years with their company before being appointed.

So continuity matters; domain knowledge matters; and persistence matters. You can’t have much impact on the world around you if you are constantly on the move. Therefore, my advice is not “move out, move away, move on.” Rather it is “hang on, hang in, and make a difference.” Dive in to the challenges faced in your community. Make an in-depth study of your industry and your company’s products and services. Volunteer to help with anything. And invest deeply in building relationships within your firm—and not just with your bosses or peers; but start with the humblest employee in your space—this could be the person who delivers packages, or picks up trash, or serves your coffee.

I want to be clear that it may make a great deal of sense to “move out, move away, and move on” if you distrust the leadership of an organization, or if its ethics and treatment of people don’t meet your standard, or if you simply feel called into a different line of work. But even then, it may make sense to stand and fight for what you think is right. The distinguished economist, Albert O. Hirschman argued that “exit” is not always the desirable or rational response to a disagreement with an organization. What matters is the “voice” you can find and your depth of loyalty to the mission and values of the organization.

It may seem ironic that I’m standing here today to help you “move out, move away, and move on” and yet I’m giving you this message to “hang on, hang in, and make a difference.” Please understand, I’m not suggesting that you stay at Darden beyond today; but I am urging you to find your calling and do so with loyalty to your values and vision for society—and this will entail persevering to build the organizations on which society depends. That’s how you will have an impact with your career and how you will find fulfillment.

Please accept my best wishes to you all on your ability to “hang on, hang in, and make a difference.”

  1. Here are some results from our All Alumni Survey of 2012, which had over 2200 respondents from across the alumni population. (Note that the Classes of ‘08-’12 are not included as 5 years had not yet passed; this cohort shows 68% still in their first job.)
    image []
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A New Bubble? What New Era?

Are the markets going mad? That is a question many investors might have asked in recent weeks, as stocks in the UK, eurozone and US have soared – even as bond spreads decline.

* Gillian Tett, “Markets Insight: Phoney QE peace masks rising risk of instability


The public discussion of bubble-like conditions in the financial markets is missing the forest for the trees. Gillian Tett and others focus on data patterns, index movements, and other market metrics while ignoring the larger question of what is driving this behavior. Her title implies that it’s all about QE (quantitative easing) by central banks. The financial repression induced by QE is quite influential in the markets, but a “bubble” is motivated by much more, which I outlined in my just-previous post. As the radio commentator, Paul Harvey, used to say, “there’s the rest of the story.”

A key driver of a bubble is “new era” thinking, the belief in a new paradigm, the conviction that the rules have changed permanently, in some fundamental way. As Sir John Templeton once said, “The four most dangerous words in investing are ‘This time it’s different.’” Those words prompted the title of the iconic book on financial crises by Carmen Reinhart and Kenneth Rogoff.

“New era” thinking has preceded every one of the major market busts in recent memory. Leading up to the Panic of 2008 was the belief that housing prices could only rise and that demand for housing was practically unlimited. Leading up to the bust of 2001 was the Internet boom and the belief that new information technology would radically and rapidly change all business models (that may happen, but not at the speed believed in 1998-99). Financial crises of the 1990s in Russia, East Asia, and Latin America were brewed in visions of long-term rapid economic growth and the ability of those regions to handle massive inflows of “hot money.” I could go on at some length, but you get the picture.

If we are in the onset of a new “bubble” today, where is the “new era” thinking, and on what is it predicated? Consider these possibilities:

· Shale gas, fracking, and permanently lower energy prices for the developed economies. I can find no one who thinks this isn’t a big deal. Some of the analyses I’ve seen suggest that the economic impact of shale gas will be huge. But in the media it is hard to separate the rigorous analysis from the buoyancy and bloviation of “new era” thinking .

· Austerity works. Government actually reduces its debts and deficits without triggering revolutions or social unrest among the long-term unemployed and under-employed. Economies grow. Bondholders rejoice, as will Tea Partiers and Libertarians. This “new era” vision could be a long shot, as Keynesians will be the first to argue. But some radio talk show hosts make it seem just around the corner.

· New technology redux. Last week, I heard Jeffrey Immelt, CEO of GE, extoll the rise of the Industrial Internet, in which machines talking to one another will dramatically improve manufacturing efficiency and profitability. For instance, he says that such improvements have reduced the labor content of GE’s jet engines to only 5% of the total cost per engine. In Immelt’s view, enhancements in new technology will drive manufacturing back to America. This may be good for corporate profits, but what about employment and consumer spending?

And if you hang around a university long enough, you’ll hear late-night student bull sessions spin out many more possibilities. The three “new era” visions I mentioned are plausible; over time, any one of them could turn out to be true. But they sure warrant critical reflection. As Yogi Berra said, “It’s tough to make predictions, especially about the future.”

Critical reflection on the “new era” sentiments is how analysts and pundits could usefully shed some light. In particular, four dimensions beg for attention:

· Profitability. Bigger is not better. Better is better. The realization of more economic activity is useless if it does not generate benefits in excess of the costs to produce those benefits. How profitable will be the “new era”?

· Timing. How soon will the net benefits of the “new era” arrive? How long will those benefits last?

· Growth. Will the net benefits change over time? With they grow? Will they decay? How fast?

· Investment. What’s the outlay necessary to realize this future?

These four factors are the underpinning for valuing just about any asset and should prompt a host of probing questions about any of the “new era” scenarios.

In my experience, it is good questions, rather than fervent opinions, that mark the successful investor. I don’t think that the popular conversation is asking enough questions about the fundamentals that might possibly underpin the current market conditions.

Whether we’re in the early stage of a bubble or not, investors are well-served by critical thinking about firms and market conditions. You’ll find plenty of it at the forthcoming University of Virginia Investing Conference, November 14-15, 2013 at Darden. The theme of the conference is “Finding Opportunity in an Unpredictable World.” We already have a line-up of impressive speakers and stimulating sessions. Mark your calendar.

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A New Bubble?

“Recession-Plagued Nation Demands New Bubble to Invest In”

- The Onion, July 14, 2008.

‘When I use a word,’ Humpty Dumpty said, in a rather scornful tone,’ it means just what I choose it to mean, neither more nor less.’

‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’

- Lewis Carroll, Through the Looking-Glass

This kind of news is hard to make up: The Dow Jones Industrial Index topped 15,000 two weeks ago, setting a new all-time high and encouraging one writer to envision a Dow of 116,200. One journalist wrote, “You know it’s a big bull market when even some of the most disliked stocks muster huge rallies.” The VIX index (the so-called “fear index) is at a five-year low point, suggesting to some observers that investors must be throwing caution to the wind. I visited Miami recently and was told that boom-like conditions had returned to the market in condos there. Housing prices have risen over 12% nationally over the past year, prompting some analysts to mark the reappearance of a housing bubble. Stock market pundits acknowledge “animal spirits” at large in the markets but argue that the bull market still has a long way to run—yet other pundits say that the bull market in commodities and bonds has ended. Funds raised through Initial Public Offerings (IPOs) are up 50% over last year. Mergers-and-acquisitions volume is also up—along with a return to lofty pricing and with prominent contests for control affirming more animal spirits (viz: the bidding war for Sprint Nextel by Softbank and Dish Network; the buyout of Dell Inc. by Michael Dell and Silver Lake Partners at $21.3 billion; US Airways combining with American Airlines; Delta Air Lines buying 49% of Virgin Atlantic; Berkshire Hathaway and 3G Partners buying H.J. Heinz for $27.3 billion). Yahoo! paid $30 million for a news aggregation cell phone app designed by a 17-year old boy. Apple, Google, and Amazon recently spent huge sums on tech acquisitions. High-yield (lower quality) lending by banks has also increased sharply, prompting the Fed to wring its hands over the possible deterioration in lending standards and controls. Research suggests that the zeal of investors to buy the high-yieldclip_image002 paper is a direct result of the financial repression by the Fed: with interest rates at all-time lows (driven by the Fed’s quantitative easing) investors are reaching into riskier segments of the investment spectrum. By printing money, the Fed produces a cycle that distorts prices and leads to bad decisions by consumers, investors, and business leaders. With a yield to maturity on 10-year Treasury bonds of 1.9 percent and consumer prices rising at about 2.2 percent, lenders to the U.S. government are accepting a negative real return.

What is weird about these conditions is that neither the U.S. nor global economies are roaring along. Expected growth in cash flows is the #1 driver of asset prices. But GDP growth in Japan and Europe is at or below zero. The U.S. is shuffling along at about 2% per year, hardly fast enough to stimulate job creation or capital spending that would justify lofty asset prices. It would seem that “the falcon cannot hear the falconer”: prices are detached from reality.

Accordingly, we’ve seen the concept of an economic “bubble” return to talk shows, market commentaries, and dinner-table conversations. This is significantly a 21st Century phenomenon. A quick check of Google NGram Viewer shows that the mentions of “market bubble” really only took off in the late 1990s and peaked in 2008.

Are we there yet?

Certainly, recent conditions warrant heightened attention by regulators and investors. But whether conditions warrant more extreme defensive actions depends on two things: a) more clarity about boom-and-bust cycles, and b) greater definition of “bubble.”

Cycles. The reality is that booms and busts occur irregularly—but there is little or nothing we can do to prevent them. Market economies don’t grow smoothly. The long-term trend is composed of cycles that oscillate between expansion and recession. Bubbles are associated with expansive episodes, though not all expansions have bubbles. The key points are that there will be another financial bubble in the United States some day and that it will be difficult for regulators to recognize, much less forestall.

In our book, The Panic of 1907, Sean Carr and I outlined[i] the attributes of market “tops” that are associated with bubbles:

  • Relatively high and rising indebtedness of households, businesses, and governments. Carmen Reinhart and Kenneth Rogoff highlighted this attribute prominently in their book, This Time Is Different.
  • Dramatic rise in prices reflected in aggressively high valuation multiples and transactions.
  • Buoyant demand for the assets: oversubscribed initial public offerings in equities, numerous participants in auctions for companies, natural resources, and real estate.
  • Optimism about the sustainability of future price increases.
  • Entry into the market by naïve, inexperienced, and unsophisticated investors. Bernard Baruch sold his stocks in early 1929 when he started receiving unsolicited stock tips from his shoeshine boy.
  • Talk of a “new paradigm” rendering long-standing investment maxims invalid. Such was the case during the Internet boom. “This time it’s different” is one of the most dangerous attitudes in investing.
  • Jumbo M&A deals and Initial Public Offerings. These deals change the competitive landscape and/or frame of reference for investors. Travelers Insurance acquired Citicorp in 1998, signaling the end of the regulatory ban on universal banking. The audacity of jumbo deals serves to reinforce “new paradigm” thinking.
  • Innovations in deal design, new securities, technology, and goods and services. Leading up to 1907 were the creation of trusts, new national consumer-branded products, and the spread of the telephone, automobile, and household electricity. Leading up to the panic of 2008 was the aggressive creation of exotic asset-backed securities. Joseph Schumpeter heavily emphasized the role of the inventor and entrepreneur in triggering new phases in economic cycles.
  • Aggressive financing. Banks lower their credit standards to the benefit of borrowers who lots of cheap credit.
  • Regulators and other watchdogs relax their monitoring of financial intermediaries and investor behavior.
  • Positive economic news. A recent stretch of growth.
  • Media hype and considerable popular interest. Rising prices, huge profits, jumbo deals, often to the benefit of Everyman and Everywoman, garner front-page stories.

Judged against these criteria, it just doesn’t seem that the U.S. or global economies are in bubble-like conditions. Sure, if current trends advance aggressively, we could be in bubble-land.

Definition. Robert Shiller defined “speculative bubble” as “a situation in which temporarily high prices are sustained largely by investors’ enthusiasm rather than by consistent estimation of real value.”[ii] Shiller added, “The traditional notion of a speculative bubble is, I think, a period when investors are attracted to an investment irrationally because rising prices encourage them to expect, at some level of consciousness at least, more price increases. A feedback develops—as people become more and more attracted, there are more and more price increases. The bubble comes to an end when people no longer expect the price to increase, and so the demand falls and the market crashes.”[iii] The problem is that it is impossible to translate the textbook definitions of “bubble” into an operational or actionable concept. Peter Garber notes “bubble …is a fuzzy word filled with import but lacking a solid operational definition….if we have a serious misforecast of asset prices we might then say that there is a bubble. This is no more than saying that there is something happening that we cannot explain, which we normally call a random disturbance. In asset pricing studies, we give it a name—bubble—and appeal to unverifiable psychological stories.”[iv] Some economists, such as Allan Meltzer[v] and Olivier Blanchard[vi], allow that some deviations from fundamentals may be rational, as for instance, where a market price depends on its own expected rate of change. That is, perhaps the changes in asset prices will be self-fulfilling. Meltzer has written, “Bubble phenomena are what remain unexplained by [some rational hypothesis]. In this sense, bubbles are a name assigned to phenomena that may be explained by an alternative hypothesis….”bubble” is a name we assign to events that we cannot explain with standard hypotheses.”[vii]

At the core of the concept of a bubble is a sense of psychological instability. Alan Greenspan, chairman of the U.S. Federal Reserve Board expressed the concern on December 5, 1996 coined the phrase, “irrational exuberance” in suggesting that prices in the stock market might not be reflecting economic fundamentals.[viii] After the stock market had risen considerably further, on February 23, 1999, Greenspan was asked whether he still thought the market displayed irrational exuberance. He replied that irrationality is “something you can only know after the fact.”

The basic problem is that not all explosive movements in prices are bubbles, manias, or evidence of irrational exuberance. As Alan Meltzer has pointed out, asset prices exploded in Germany in the 1920s in response to the Reichsbank’s monetary expansion.[ix] Popular usage of “bubble” has been sloppy and perhaps self-serving. Humpty-Dumpty is instructive: “bubble” probably means whatever the writer or speaker wants it to mean.


It may be true that The Onion got it right, that investors are starting to build a new bubble. Certainly, that could be the consequence of a very expansive monetary policy. But I think that it’s just too early to tell and the whole concept of a “bubble” remains fuzzy. However, anxieties aren’t unwarranted. Maladroit unwinding of the Fed’s program of quantitative easing could trigger a sharp reversal of investor expectations, which might look like the bursting of a bubble.

[i] We developed this list from field observation and Shiller (2000), Kindleberger and Aliber (2005), Lowenstein (2004), Hunter, Kaufman, and Pomerleano (2003), and Caverley (2004). Caverley (page 13) offers his own abbreviated list. See the bibliography in Panic of 1907 for details on these sources.

[ii] Robert Shiller, Irrational Exuberance, Princeton: Princeton University Press, 2000, page xii.

[iii] Robert Shiller, “Diverse Views on Asset Bubbles,” chapter 4 in Asset Price Bubbles: The Implications for Monetary, Regulatory, and International Policies, W. C. Hunter, G. G. Kaufman, and M. Pomerleano eds. Cambridge, MIT Press, 2003, page 35.

[iv] Peter M. Garber, Famous first Bubbles: The Fundamentals of Early Manias, Cambridge: The MIT Press, 2001, page 4.

[v] Allan H. Meltzer, “Rational and Nonrational Bubbles” Chapter 3, in Asset Price Bubbles: The Implications for Monetary, Regulatory, and International Policies, W. C. Hunter, G . G. Kaufman, and M. Pomerleano eds. Cambridge, MIT Press, 2003.

[vi] See, for instance, Olivier Blanchard, (1979) “Speculative Bubbles, crashes and rational expectations,” Economic Letters 3, 387-389, and O. J. Blanchard and M. W. Watson, (1982) “Bubbles, rational expectations and speculative markets,” in Crisis in Economic and Financial Structure: bubbles, Bursts, and Shocks, P. Wachtel, editor (Lexington Boos, Lexington, MA).

[vii] Allan H. Meltzer, “Rational and Nonrational Bubbles” Chapter 3, in Asset Price Bubbles: The Implications for Monetary, Regulatory, and International Policies, W. C. Hunter, G . G. Kaufman, and M. Pomerleano eds. Cambridge, MIT Press, 2003, page 24.

[viii] Alan Greenspan’s speech is worth reading in full, and may be found at

[ix] Allan H. Meltzer, “Rational and Nonrational Bubbles” Chapter 3, in Asset Price Bubbles: The Implications for Monetary, Regulatory, and International Policies, W. C. Hunter, G . G. Kaufman, and M. Pomerleano eds. Cambridge, MIT Press, 2003, pages 23 and 27.

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