Warren Buffett: Business School Is A Waste Of Time

Key Concepts

• Financial Illiteracy: A lack of understanding of basic financial principles, leading to poor financial decisions.
• Negative Net Utility of Finance Education: The idea that, for a period, finance education in universities actively harmed students’ financial understanding.
• Capital Allocation: The process of distributing financial resources to the most profitable opportunities.
• Berkshire Hathaway Valuation: The difficulty in accurately assessing the value of Berkshire Hathaway due to its size and unique structure.
• Dividend vs. Share Buybacks: The debate over whether to distribute profits to shareholders through dividends or by repurchasing shares.
• Orthodoxy in Finance: Rigid adherence to established, but potentially flawed, financial theories and practices.

The Detrimental Period of Finance Education & Financial Literacy

The discussion begins with a strong critique of finance education in major universities over the past 20 years. Warren Buffett asserts that, during this period, the “net utility of knowledge given to finance majors…was negative.” He describes this situation as “plurvy asinine,” suggesting the education provided was not only unhelpful but actively detrimental. This stemmed from a rigid “orthodoxy” within finance departments, where subscribing to certain (incorrect) theories was a prerequisite for employment, even within academia. While acknowledging a potential improvement in recent times, Buffett expresses concern that this period may have negatively impacted his view of higher education.

Charlie Munger echoes this sentiment, suggesting physics might have been a more beneficial field of study. The core issue highlighted is the prevalence of flawed financial theories being taught as gospel.

This lack of practical financial understanding extends beyond academia. Buffett notes receiving daily correspondence from individuals struggling with “financial lunacy” stemming from a lack of basic financial literacy, often not taught at home or in school. He emphasizes the lifelong consequences of such illiteracy, stating that “digging yourself out of the holes that that financial illiteracy can cause, you know, spend the rest of your lifetime doing it.” He supports early financial education, citing the “Secret Millionaires Club” exhibit as an example of reaching young audiences.

The Role of Parents & Schools in Financial Education

The conversation shifts to the responsibility for financial education. While Buffett acknowledges the importance of learning financial habits at home (“we got it in our families…learning it at the dinner table”), Munger firmly believes parents bear the primary responsibility. However, he concedes that “not everybody gets the right parents,” creating a need for external intervention.

Buffett suggests schools are the “best bet” for addressing this gap, particularly as it’s harder to improve habits than to instill them initially. Munger, however, is skeptical of the schools’ ability to fix the problem, stating, “It’s very hard to fix people who have the wrong parents.” He humorously frames the challenge as an impossible task, stating he’s only good at “raising the top higher,” not fundamentally changing ingrained behaviors.

Berkshire Hathaway Valuation & Dividend Policy

A shareholder question from Shan Shau of Ottawa, Ontario, raises the issue of Berkshire Hathaway’s valuation and dividend policy. Shau points out the difficulty in valuing such a large and complex company and notes the desire of some long-term shareholders for a dividend to supplement their retirement income. He proposes breaking the company into four logical groups to “unlock some value.”

Buffett emphatically rejects this idea, stating that breaking up Berkshire would lose significant value due to advantages in capital allocation and tax benefits. He references a previous discussion in the annual letter to shareholders comparing dividends to shareholders selling their shares, highlighting a tax-efficient method for shareholders to access capital without a formal dividend.

Buffett further notes that a recent vote demonstrated strong shareholder preference (45 to 1) for maintaining the current policy. He acknowledges that share price doesn’t increase every year, but emphasizes the overall long-term growth.

Critique of Finance Academia & Capital Allocation

Buffett reiterates his earlier criticism of finance education, stating that “the main troubles with education in this field are probably not in the grade schools. They're probably in the colleges.” He believes “a lot of asinity [is] taught in the finance courses at the major universities and even the departments of economics have much wrong with them.” He cautions against assuming higher education automatically equates to better understanding.

Underlying this critique is the importance of sound capital allocation. Buffett and Munger’s success at Berkshire Hathaway is largely attributed to their ability to effectively allocate capital to profitable ventures. Breaking up the company would hinder this ability, diminishing its value.

Logical Connections & Synthesis

The conversation flows logically from a broad critique of financial education to a specific discussion of Berkshire Hathaway’s structure and policies. The initial concern about financial illiteracy connects to the need for better education, which then leads to questioning the quality of current academic instruction. The shareholder question provides a concrete example of the challenges faced by long-term investors and allows Buffett to articulate his rationale for Berkshire’s unique approach to capital allocation and shareholder returns.

The central takeaway is the importance of practical financial understanding, sound capital allocation, and a critical approach to established financial theories. Buffett and Munger consistently emphasize the value of common sense and independent thinking over blind adherence to academic orthodoxy. They demonstrate a long-term perspective, prioritizing sustainable value creation over short-term gains, and advocating for policies that benefit shareholders while maintaining the company’s core strengths.