Diminishing returns

Two years back, during the stock market boom, one of my friends told me that making money had become too easy and it can’t last too long. last week, I heard a similar observation from a business unit manager, he said making money was so easy a year back that he was fine if the company created jobs even at the cost of efficiency, but in this new reality, he can’t afford budget for expensive labor unless they prove their worth. We seem to have come a full circle in the economic cycle and don’t know where we stand at the moment… and this has significant implication about how we view future MBA opportunities.

roi1(1)Expectation of returns on practically every investment decision made during the boom period must be tempered down: irrespective of whether the investment was in a house, equity stock or education! Expectation of 12-24 month payback time for the investment in MBA is already moving north towards 36-60 months! And I’m still talking about the 30-40K MBA, for the folks who invested in 60-80K MBA… well, what can I say? :)

Curiously though, while there is a direct relationship between the economic climate and demand for most asset classes, the relationship between economic climate and demand for MBA (if you consider MBA as an asset) is inversely related which means that while prices for most asset class will decrease during a recession, an MBA will become more expensive in the next few years. Come to think of it, its because the business school’s value proposition is not merely a function of actual costs and benefits for the customer, instead it is to a large extent determined by total opportunity cost (If the prospective student has lost his job or is not expecting any salary increase, there is little opportunity cost) and the shadow price (If job losses become more imminent, the price prospective students will pay for increasing probability of success even by few percentage points increases significantly) of education.

Will the situation change in the near future? I hope so… Each time I tell my classmates that the economy might not turn around for the next 2-3 years, the defense I hear is about how capital markets are bouncing back! Well, yes they are bouncing back and I haven’t ventured into any analysis here… but the stock prices could bounce back either because the actual EPS trend up or because the WACC goes down. If the capital market bounce back is a function of decreasing WACC, then it is little indication of the real health of economy.

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