Everything I Learned In Business School Is Wrong*

The Wall Street Journal noted this week that bitcoin’s market value passed the $1 trillion mark, which should make anyone pause and think for a moment. A trillion dollars is actually a lot of money, right? And what exactly is bitcoin anyway? I know, it’s a decentralized, peer-to-peer digital currency operating on the blockchain platform. But what the hell is that? There’s a lot more to learn, but one thing is certain: the world is changing in some fundamental ways. And the best way to deal with a new reality is accepting that the old reality no longer exists, a process Bayesian science calls “updating your priors” (more about the Bayesians in a future post).

So if change is the only constant, as Heraclitus said more than 2,000 years ago, life is more constant than ever. Here are some fundamentals we learned in business school that may no longer apply as the future rapidly gains on us.

Lesson #1: Invest In Things That Have Intrinsic Value and Are Easy to Understand.

At this point, bitcoin shares have a value of $55,000. It’s purely speculative. Besides the dark web and a few merchants (notably Tesla), there’s no widespread use for bitcoin as a currency. People compare it to gold because it’s a finite asset (bitcoin’s original programmer, whose identity remains a secret, placed a lid on the number of bitcoins at 21 million), but even gold has intrinsic value as a precious metal. You can’t hold a bitcoin; it’s a digital creation. Market history is riddled with speculative manias, from Dutch tulips to Chinese chickens, Japanese bunnies and ostrich feathers. Even those assets had intrinsic value. Bitcoin seems to have broken free from the gravitational field of intrinsic value.

But what about the famous investment rule advanced by Peter Lynch, who ran the Magellan Fund at Fidelity for more than 25 years: “Invest in what you know?” That’s been dumbed down a little by people who think “If I like Starbucks coffee I should buy the company (SBUX),” or “More people are smoking weed so I should buy Canopy (CGC).” What Lynch really meant was “Do your homework.” OK. If I take the time, I can understand how Tesla or Amazon work as business entities. Try understanding blockchain. Good luck with that.

So with bitcoin, people are betting on the come. And some really smart people are doing it. Paul Tudor Jones, the billionaire hedge fund manager, says bitcoin feels like the early days of the internet. Elon Musk is all in, and so is Mellon Bank. There are some bright business minds who scoff at it (Charlie Munger, Warren Buffet’s partner, described bitcoin as a “turd” and said it fit Oscar Wilde’s definition of fox hunting: “The pursuit of the uneatable by the unspeakable”). But if you believe digital is currency’s next big phase change, your time has come.

Lesson #2: Too Much Public Debt Lowers Productivity and Increases Inflation

What a quaint thought, that we can over-leverage the national budget! So 20^th Century! The Congressional Budget Office said recently that the $29 trillion-plus of national debt is on a path to exceed the size of the entire U.S. economy this year, even before the $2 trillion Covid relief package working its way through Congress. There are three prime drivers for the debt rocket: the Fed’s low-interest-rate policy helps moderate the cost of debt service; the current political sentiment on public spending is “go big or go home”; and the growing popularity of Modern Monetary Theory, which says basically that countries who issue their own currency can never run out of money like businesses or households can; they just print more. The risk, of course, is inflation. But under MMT, if we hit the inflation wall we’ll just cut back on spending or increase taxes, or both. Simple, right?

Well, let us not forget the Law of Unintended Consequences. Here’s an example. The population of starlings, a non-native bird species, in the U.S. today is as many as 200 million. Starlings are generally considered a nuisance, or worse. They destroy crops, spread disease and have even caused airplane crashes. Where did they come from? A New Yorker in the 1890s was so besotted with Shakespeare’s Henry VI and its mention of starlings that he imported a flock and let them loose in Central Park. Good intention, bad ending. Will Modern Monetary Theory follow the same path? We’re about to find out.

Lesson #3: Taking a Company Public Is a Long, Arduous Process That Requires Discipline and Perseverance

Want to take your company public, but don’t like all those irritating rules and regulations around disclosure, transparency and other unreasonable restrictions? Enter the SPAC — the Special Purpose Acquisition Company. WeWork had plans to do an IPO in 2019, but they imploded when founder Adam Neumann’s bizarre management style came under too much scrutiny. Now, WeWork is looking to go public through a SPAC. You get the idea; SPACs take companies public under the radar.

A SPAC is basically a shell company put together by an investor or group of investors that raises capital through an IPO and then takes private companies public by simply buying them. They’re also called “blank check” companies because people who buy into the IPO of a SPAC don’t know what the eventual acquisitions will be; they leave that up the lead investors. In 2020, SPACS raised a total of $83 billion and so far in 2021, they’ve raised more than $23 billion. Celebrities like Shaquille O’Neal, Alex Rodriguez and Ciara are launching SPACs, giving them a get-rich-quick aroma. If Cheech and Chong launch a SPAC, head for the door.

SPACs face a bumpy runway though. Harvard Business Review just ran a piece predicting an implosion of the SPAC bubble. SPACs may be going splat.

Lesson #4: To Be Successful, Your Business Model Must Be Profitable

Here’s a partial list of companies that continue to lure investors without yet having turned a profit: Uber, Snap, Square, Pinterest, WeWork, and Spotify. The old adage goes that you need to spend money to make money. These guys are spending, but they have yet to fill the other side of the equation. These are investments of confidence and optimism at the moment. To be kind, these businesses are still in the formative stage, so maybe this business lesson just needs to be tweaked slightly: To Be Successful, Your Business Model Must Be Profitable — At Some Undetermined Point In the Future.

Looking at these trends — cryptocurrency, SPACs, free money — it’s hard to predict how any of them will pan out. The common denominator is that all of them are bucking traditional business or economic paradigms. But that is the nature of disruptive innovation; otherwise, they wouldn’t be disruptive. For anybody interested in tracking the future, I guess the advice is to be aware of what’s going on and be willing to discard conventional wisdom when it’s proven wrong. Because as someone once said, somewhere: It ain’t what you don’t know that gets you into trouble; it’s what you know for sure that just ain’t so.

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*Caveat: My last exposure to business school at the university level was in 1970-74; I’m sure the curriculum has significantly evolved since then.