In the year preceding its decline, Enron was the top employer at Harvard Business School. The following year, that honor went to McKinsey & Company and the consulting industry imploded shortly thereafter.
Generally, if MBAs flock en masse to an employer or industry, that implies that the company is dramatically overpaying relative to the productivity of the labor it is hiring. This, of course, is not sustainable and is a sure sign of a bubble. So, what do the summer internship experiences of Stanford GSB students this year say about the frothiness of certain areas of the economy? Let's begin!
Real estate = bubble.
It's true, I read it on CNN.com; USA Today even had an infographic on it. Sure this platitude is near conventional wisdom, but I thought I'd contribute my own data point. Everyone and their mother wants to get into real estate right now. To be honest, this caught my completely off-guard--I was completely unaware that this was a sexy thing to do. Generally when everyone else wants to do something, I feel like I should do it as well (it's called peer pressure). Did I have a latent interest in real estate investing? Should I drop my resume with Trammel Crowe? What is a Trammel Crowe?
Google = unclear.
The big talk around Silicon Valley interns is about Google's cafeteria. Apparently they have 9 different cafeterias on campus. One intern said the Cafeteria is a "top 5 restaurant in the bay area". Another intern likened it to Thomas Keller's famous French Laundry restaurant in Napa. Like the bean bag chairs of the 1990s this too could be a sign of the bubble. Will Google still be serving lobsters and boar soup 15 years from now? Google has 5,680 employees. If the food is so darn good, maybe the the company is spending $20 per person per day. Over the course of the full year (250 working days) that comes to $28 MM in foregone operating income. Sure, that's a drop in the bucket compared to the $2 BN the company earns today, but I wonder what is going to happen in a couple years when the CFO is $20 MM away from making his EPS targets? Hmmm? No boar soup for you!
On the otherhand, Google has hired some ridiculously talented MBA interns from Stanford and has been very selective in its hiring process. The ability to attract really solid MBAs is somewhat remarkable since the company has a reputation of treating business folks as second class citizens. As if!
Hedge funds = short them.
Unlike real estate, I was aware that this was a sexy thing to do. I was not really that surprised that most of my classmates with deep finance experience (mostly private equity) decided to try it for the summer. What did take me aback was that many of them were joining extremely well capitalized funds where the general partners had virtually no hedge fund investing experience. Now it's perfectly fine to hire inexperienced junior people, but it might be problematic to have no one at your firm that really knows what they're doing. When the yield curve twists and you're long 10 year bills and short 5 year notes who do you go to for advice? Don't come to me, that's for sure! I'm keeping my money in coconut futures, thank you very much.
Small businesses = gold mines of cash.
Unfortunately, MBAs tend not to flock to businesses and industries that are undervalued. As a result this exercise won't really identify any winners you should invest in (though you hedge funders can go long on the S&P and short a REIT, booyah!). Nevertheless, a friend working in the building supply industry tells tales of ridiculous profitability and free soda in the vending machines. My own experience this summer trying to rollup small businesses has led me to somewhat concur. More on this in another post.
Web 2.0 businesses = no bubble yet...
In 1997, Stanford MBAs were dropping out left and right to join such fine establishments as pets.com, Webvan, and some company called Echo Bay Technologies. You do not see a similar get-rich quick ethos pervading the class yet anyways. However, by January 1, 2007, I plan to launch the next big thing that will definitively lead to untold riches.