VALUE: After Hours (S07 E32): PhDs Good, MBAs Bad: Sorry Business School

During their recent episode, Taylor, Carlisle, and Kai Wu discussed PhDs Good, MBAs Bad: Sorry Business School. Here’s an excerpt from the episode:

Tobias: I was looking through your documents and I saw you tracked the number of PhDs.

Jake: Is that a leading or is that a– You want to talk about a PhD? [chuckles]

Kai: Let me tell you a fun story. So, actually, PhDs, at least historically have been a valuable indicator. It’s not just a tech proxy. It’s like adjusting for sector. Let’s say, the companies that are investing more in your high-end talent, folks who are coming from MIT, PhDs and machine learning, those guys are pretty good and pretty sought after. So, the ability to pull those people is an attractive thing. One fun thing I did was [chuckles] I also look at MBAs. So, MBAs are actually a negative signal.

Jake: Oh, damn it.

[laughter]

Jake: I knew I wasting my time. [laughs]

Kai: Yeah. You’re setting yourself up for that one. [laughs]

Jake: Yeah. Stepped right into it.

Tobias: So, there is a positive correlation, the more PhDs you have, the better your returns?

Kai: Stock returns adjusted for price. So, everything’s normalized by market cap. So, in this case, it’s not just number of PhDs, because you’re just getting large-cap stocks. You’re saying, “Hey, per dollar invested, how much intangible capital am I getting out?” Whether it’s PhDs or trademarks or patents, the whole idea is a dividend yield because we’re value investors.

If you build a portfolio simply of the most intangible intensive companies, highest R&D divided by sales, highest PhDs divided by total employees, you basically get tech, [chuckles] which is fine. But I don’t know to what extent that’s persistent moving forward. Because while tech has outperformed historically, right now it’s priced in. Everyone knows that these are good companies. While network effects were, for example, underappreciated for a long time, people know that these things are not important now. And so, now, the key is finding undervalued network effects where it’s not already priced into the stock.

Jake: It would seem like also, if you’re having to fish for these people with $100 million signing bonuses at some point, that’s neutralized a little bit, isn’t it?

Kai: Exactly. Right. [chuckles] If $100 million is coming out of the stock in stock-based comp or whatever, somehow then that’s going to offset whatever value these people bring to the table, for sure.

Tobias: Can you take us through some of the positions, and how they would be turning up in your portfolio and defying more traditional classification of those positions?

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VALUE: After Hours (S07 E32): PhDs Good, MBAs Bad: Sorry Business School

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