Ahead of the Curve (20 page)

The best advice on choosing a career, Buffett said, was to find something you loved. After that, the money would seem unimportant. He said he drank the same sodas as us and ate the same fast food, though he got a discount at Dairy Queen because he owned it. He slept on the same kind of mattress, which meant for at least seven hours in the day we were no less comfortable than he. The only real difference, he said, was that “I fly differently.”

Reading Lowenstein’s book, I saw behind Buffett’s avuncular demeanor to the extraordinary diligence and prescience, the almost mystical feel for companies, prices, and markets, a refusal to use anything but his own judgment, a pencil, and stacks of printed company reports to make decisions. Since childhood, when he had begun with a single paper route and consolidated the paper routes of all the children in his neighborhood into a cartel, Buffett had been obsessed with the idea of building, conserving, and growing his capital. Every cent spent now he viewed as ten cents lost in the future. I found myself admiring Buffett in the way I admired those flinty old American pioneers who appear in nineteenth-century paintings— gaunt, bespectacled, and oozing Protestant virtue. If he had not been an investor, I thought, he might have been a small-town grocer, wearing his brown, ankle-length smock, counting every penny, and squinting through the evening gloom rather than turning a light on. He was never happier, I read, than when hunkered down in his favorite nook off the landing of his home in Omaha, a Cherry Coke in one hand and a company report in the other, scouring for the next opportunity in razor blades, local newspapers, or insurance.

I could not envisage being either Lynch or Buffett, but when I applied for these summer jobs, I envisaged being a well-paid stooge, comfortably off, doing some interesting work and having time for myself and my family. With a second child on the way, a large part of me wanted to take care of the financial side of life as easily as possible. The balance of low risk and high reward in mutual fund management seemed ideal. In fact, the only real risk in this work seemed to be boring yourself to death. When I told Justin all of this, he said I had to change my attitude.

“You just don’t realize how seriously everyone else is taking this, do you? You’re going to be competing against people who have been plotting their route into investment management from the moment they stepped on campus.” He was right. Many students had compiled elaborate color-coded spreadsheets to plan their job searches, relentlessly calling alumni and pressing them for help and contacts. I had read a few books and thought about them a bit.

I was invited to interview at two companies: one in California, which I had applied to before finding out that Margret was pregnant; the other in Boston. The evening before my first interview, the California firm held a get-to-know-you dinner at an Alsatian restaurant off Harvard Square. Thirty of us crowded into a basement room, tricked out like a German
Stube
. You could spot the executives by their gleaming white shirts and the fact that they were throwing back red wine while the rest of us sipped delicately at soda water. I was seated opposite a fund manager who had bristling silver hair and a burning red shaving rash all over the lower half of his skeletal face. He was a caricature of dissatisfaction. His breath, which worsened with every gulp of Merlot and slice of roast duck, was paint stripper and his humor barbed.

He told us he was a technology consultant for years before achieving his dream of stock-picking for a living. “I lived and breathed stocks,” he said, staring at me goggle-eyed. “That’s the only way to do this. I read every book I could. I learned about every company I could. I didn’t go to business school. There were no short-cuts for me. I ran my own portfolio while I was working and kept on applying for these jobs until finally I got this one.” He asked us how many of the cases we read in preparation for class. All of them, I told him. Two Indian men at the table said they read only one in three or one in five at the most. I could not tell if they were joking, but they said that they had better things to do with their time at HBS than read sloppy marketing and LEAD cases. For example, they liked to play poker five nights a week. The fund manager seemed to like this. With dessert came a shuffling of places and another of the executives came and sat at our table. He and his colleague began to trade war stories while sloshing back more wine. “Did you see Howie just played Pebble Beach? Howie runs our media fund. He’s the guy who bumped off the CEO of AOL. Brilliant guy. Legend. Beats the market every year. Never misses. Twenty years straight. Rupert Murdoch calls him for advice. I mean, the guy’s a legend. He bought Viacom at ten!”

Away from home with nothing to do but interview students, they were wallowing in their fully expensed trip, ordering more wine, more chocolate ganache with raspberry sauce, swapping more war stories. “So Bill was reading the financial statements—Bill’s our head retail analyst, guys—and he noticed that inventory had just gone through the roof and same-store sales were lagging. They were just piling up crap in the stores and no one was buying, but it was still seen as this hot company, right? So he started unloading the thing. No one else had seen it and he got out before the stock tanked thirty percent. Unbelievable.”

I left as soon as I could. The freezing air in Harvard Square was sharp and refreshing. I was happy to be out of there.

I arrived in Spangler at 8:30 A.M. to find my two interviewers, an older man and a woman who had graduated from HBS just a couple of years earlier, gingerly peeling back the plastic tabs on their Styrofoam coffee cups. They had had a long night. The first question they put to me was this: In fifteen minutes, you have to make a realistic bid to purchase Harvard Business School. How much do you bid?

They were trying to see how I went about the process of valuation.

“Who’s buying?” I asked.

“You are,” said the man.

“But am I a private company planning to turn HBS into an executive retreat or an educational business or a real estate developer or what?” They shrugged. I began building a balance sheet for HBS, listing its assets, liabilities, and equity. First there was the real estate on the banks of the Charles River, close to Boston, populated by office buildings, apartment blocks, classrooms, a gym, an auditorium, and a library. I took a wild stab. I had read that the new Spangler building, by far the largest building on campus, had cost around $100 million to build. I reckoned Spangler made up perhaps one tenth of all the real estate on campus. I also assumed that if the campus was forty-four acres in size and that each acre in this area of Boston cost around $1 million, then you had at least $44 million of raw land underneath all of these buildings. So how about a billion dollars for the real estate?

Then there was the endowment, $1.5 billion or so sitting in various accounts. I did not think this could be considered in any purchase, since the money would be tied to the specific mission of Harvard Business School and not be available to some new acquirer. It would probably have to be returned to the donors or credited to the general university endowment. The school had no debt to speak of, and its sole equity holder was itself. As to revenue and costs, our section had recently had a visit from the school’s management department and I seemed to recall that tuition from MBA students made up around one third of HBS’s total income. The rest came from executive education and publishing books and cases. So, if there were 1,800 students each paying $38,000 per year for tuition, that came to around $68 million; multiply that by three, comes to just over $200 million in total revenue. Since the school does not run for profit, all of that is spent each year in various ways, from paying professors to manicuring the grounds. If you wanted to run HBS for profit, you could probably do so handsomely at first, though over time, I wondered, the loss of not-for-profit tax advantages and the official links to Harvard University might shrink your margins. But assuming you could make 20 percent before interest and tax, and a valuation multiple of fifteen times earnings, HBS might be valued at $600 million.

Time was running out, so I tried to ask some more questions. Could the school still call itself HBS? Would it retain its links to Harvard? If not, what would this mean for one of the school’s key assets, its professors? Would they decamp to a more traditional university? If there was no way to retain them, this would drastically lower the value of the asset. My interviewers refused to give me any hard answers. There seemed to be so many variables, and by now the piece of paper in front of me was a mess of numbers, squiggles, and arrows leading nowhere.

“So what number are you going to write on the check?” the woman asked.

“I read recently that the New York Yankees were worth around six hundred million,” I said. “So given the unique uses for the real estate, and stripping out the endowment, and with all the uncertainty about this new institution’s ability to use the Harvard name, how about a little more than the Yankees, around seven hundred million.” It was a deranged muddle, and they gave me this strange stare before jotting something down on their notepads. They were probably writing “half-wit.”

The next morning, I interviewed with a Boston-based mutual fund firm. True to its thrifty reputation, there was no dinner beforehand, just a conference room, two white men in white shirts and dark ties, and me.

“You have an interesting résumé,” the older of the two began. “But what makes you think you could evaluate and pick companies to invest in?” I had developed a spiel about how journalism and investment research required similar skills, principally the ability to discover and weigh up many different kinds of information, from quantifiable facts to softer judgments about the character of individuals. I told them how I had been through a number of very tough situations, from earthquakes to terrorist attacks, where I had to gather information quickly and write clearly under strict deadlines. They nodded and noted and asked me what I thought about buying Apple stock.

This was February 2005. The iPod was already a runaway hit, and Apple was hoping its PC business would be able to piggyback on its success. So I said that I thought Apple was a great company but that its historic difficulty in achieving sustained success made me hesitant. It had always been an innovator but it was inconsistent. I wondered how long the iPod would continue to make money and whether consumers would really choose Apple computers simply because of their experience with the iPod. As an investor, I might wait to see what else Apple had in its pipeline and also wait for some heat to come out of the stock. And I would also like to find out who beside Steve Jobs could run the company. Having such a dominant CEO had advantages, but the great risk was succession. My interviewers nodded to each other and jotted something down.

Next, they asked, what makes a stock price move? This was one of those questions where you think you have an answer, until you have to give it. All kinds of things, I said. Fundamentally, the price moves according to changing expectations of future earnings, but what influences those changing expectations remains a mystery. Some say the markets are so well informed that all changes are rational, based on accurate forecasts of future earnings. Others believe a herd mentality can set in and that prices end up being set by the most basic human emotions: greed, fear, envy, lust. I do remember my hand seeming to take on a life of its own as I offered my explanation, moving up and down and round and round as if on an invisible roller-coaster. I tried to read my interviewers’ reaction. But their faces were expressionless.

That evening I learned that neither company wanted me for a second interview. I thought I wouldn’t care, but I did. I wanted to adhere to the HBS culture because it seemed to promise so much, but then again I didn’t, because it seemed so formulaic. I wanted to be a part of this thing, but did I really? It was turning out to be more of a struggle than I had ever imagined.

Fortunately, I was not alone. Luis cornered me one day to ask about my plans for the summer. He was carrying his soccer boots and heading off for a game.

“This pressure, man, it’s insane,” he said. “When I got here, I knew I wanted to pursue the entrepreneurial path. But now, with this interview thing—and you see all these big famous companies coming to campus like Google and Skype—I’m thinking maybe I should go and work for one of them.”

“I know,” I told him. “I nearly convinced myself I could be an investment banker. I realize I’m comparing myself to the other people here and it’s killing me. I’ve got to stop.”

“You’ve got to have a super strong conviction about what you want to do here,” he said, resting one soccer boot on my shoulder. “You know what finally stopped me chasing these things? It was hearing about the grilling people were getting for these stupid summer jobs. For people like you and me, the old guys, it’s too undignified.” Luis had decided he would go home to Madrid and spend the summer helping an American online travel company that was seeking to crack the European market. “I’ll be able to do it on my own time,” he said. “No boss.”

Justin applied to the investment banks and got a job. “It’s going to be great,” he told me, waving his offer letter at me.

“No it isn’t.”

“I can’t listen to you anymore,” he said, plugging his ears. “You’re a corrupting influence. La, la, la, la, I love investment banking, investment banking’s what I love.”

Annette, also from the section, had performed the most stunning volte-face. She had arrived at HBS with a scholarship from a top investment bank, which was paying for her tuition and had guaranteed her a summer job and a job when she graduated. But the prospect of returning to Wall Street tortured her.

“I knew that if I went back, that was it,” she told me. “I would be there for the rest of my career. The money and status are very addictive.” Instead, she wanted to get out of financial services and into a company with a real, physical product to sell. She had received an offer from a fashion house to work in their marketing department over the summer. The money was half of what the bank was offering. And if she took the fashion job, she would forfeit her scholarship and more than sixty thousand dollars in tuition grants. “I did what I always do when I face a dilemma,” she said. “I locked myself away and just forced myself to make a decision. I had to leave finance.”