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## Seven things value investors used to learn at Stanford Business School

A little while ago Portfolio ran this great Felix Salmon article about Chris Wyser-Pratte, a 1972 Stanford MBA grad who spent the next 23 years as an investment banker, and the seven principles he was taught at Stanford Business. When I read through them, I was struck by how timeless they are, and how readily applicable to value investing. Here is Mr Wyser-Pratte’s list in its unadulterated form:

I learned exactly seven things at Stanford Graduate School of Business getting an MBA degree in 1972. I always used them and never wavered. They were principles that enabled me to put the cookbook formulas that everyone revered in context and in perspective. I think they served my clients (and perhaps me) rather well. Here are those seven principles, and who taught them to me:

1. Don’t use many financial ratios or formulas, and when you’ve picked the few that will actually tell you what you want to know, don’t believe them very much (Prof. James T.S. Porterfield);
2. Remember that any damn fool can compute an IRR or DCF. The trick is to find a business that can return 20% after tax, understand its critical indigenous and exogenous variables, and then run it so it meets its return target. (Prof. Alexander Robichek.)
3. Always ask what can go wrong (Porterfield);
4. Never extrapolate beyond the observed points of a distribution, you have absolutely no information outside the observed range (Prof. J. Michael Harrison);
5. Remember that you can always break the bank at Monte Carlo by doubling your bet on red at the roulette table every time you lose. The problem is it will break you first; It’s called “the takeout.” Therefore, always manage your financial structure so that takeout is not an issue. (Porterfield.)
6. Big M (today Nassim Taleb’s Black Swan) is never a part of the optimal solution. If it shows up in the answer with any coefficient greater than zero, you have the wrong answer and have to continue to do program iterations. (Harrison.)
7. There is never any excuse for looking through the substance of an economic transaction, whatever the accounting, and if the accounting permits you to do so, it’s wrong (Prof. Charles T. Horngren.)

Read more at Portfolio. I’d love to hear any other great lessons you might have learned in business school or otherwise.

### 4 Responses

1. Yes. These 7 things are as timeless as value investing.
The problem with today’s investing community is that all are trying to find the next big theory of making profits! But reality is that such theories have long been discovered and are sometimes as simple as buying boring big businesses and doing nothing!

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2. […] Seven things value investors used to learn at Stanford Business School- via greenbackd.com – I learned exactly seven things at Stanford Graduate School of Business getting an MBA degree in 1972. I always used them and never wavered. They were principles that enabled me to put the cookbook formulas that everyone revered in context and in perspective. I think they served my clients (and perhaps me) rather well. Here are those seven principles, and who taught them to me […]

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3. I’ve always liked Soros’s take on the market, which is that it is impossible for markets to ever be in perfect equilibrium because they are feedback loops by design. Therefore, the only question is how near or far from equilibrium are they? This also means that you will always be wrong in some aspect of your assessments, so you better be diligent and look for your margin of safety. That is kind of like tip #1.

But here’s one for you out of the 1923 classic Reminiscences of a Stock Operator. If managers come out publicly and say that their stock is going down because of a bear raid, and then the stock keeps going down after, then it isn’t just a bear raid. This one line echoes the last days of Bear Stearns when their CEO took to CNBC the day before going bankrupt to say it was a bear raid. It just goes to show that things never change. In the words of Ben Graham, “Wall Street people learn nothing and forget everything.”

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