Evaluating the Greatest Investors

Sometimes new research comes from unusual encounters.In the winter term of 2005, I was a visiting professor at the MIT Sloan School of Management. I had always wanted to teach at MIT, ever since as a UMass chemical engineering student, we took a trip there. As I walked down the corridor every book I was using was a name on a door. On this visit, I taught a course in investment management, the second term of a year long sequence for engineering, robotics and other non-finance majors, largely PhD students who wanted to learn about investments. The first term term was taught by Andy Lo who arranged to provide me with his notes from the previous time he taught the second semester. I was thrilled to teach at MIT and put more effort into that course than any other I have taught in a long time. MIT has very good terms for visitors, basically they are paid half that of the regular professors, this argues that research and administration count half and teaching the other half. In the course I had three parts: my slides on practical investments, Lo’s notes and the text book by Bodie, Kane and Marcus (2005). My TA was helpful and I packed in a lot of material in each lecture. I expected top future stars to challenge me in the lectures but that never happened. In the midterm exam, I had a mixture of the book’s test problems and used their answers which were multiple choice, Lo’s notes and my lecture material. According to the book, there was one unique correct answer. Unfortunately, some of the students argued with the TA that some of their other answers were also correct. Being a visitor I deferred to my TA who was a PhD student, sticking to the one correct answer. I learned that the students were of two types: (1) those who loved the course and my teaching and were keen on learning several of whom went to hedge funds or Goldman Sachs or similar firms and I helped them with that transition; and (2) the other group who were worried about getting a top grade and were threatened given that we were strict on the midterm, so they marked me down in the ratings which I never looked at (according to my wife who looked at them). It was UBC basic statistics all over again: students uninterested but stronger students. All the MIT students had distinguished records coming into that great university so their fear of not being at the top is understandable. A couple years later, John Cox the MIT finance chair called me about teaching again. I had been very social and took all the seminar speakers to lunch and had been a good visitor colleague. Unfortunately, for John and me, a dean blocked the visit after consulting the ratings: one third terrific and two thirds luke-warm or worse, killed the idea…