Marco Di Maggio is the Assistant Professor of Business Administration at Harvard Business School. He was listed among the ‘2016 Best 40 Under 40 Professors’ by Poets & Quants.
In this interview with Swati from the MBA Crystal Ball team, Professor Di Maggio shares his views on a wide range of topics related to learning and teaching finance.
Students with a more qualitative background end up being at the very top of my quantitative class.
MBA Crystal Ball: What is it about the Harvard MBA program that has made it a top choice for finance aspirants?
Professor Di Maggio: My top picks: the (extraordinary) resources that the school invests in the program, the great variety of elective courses that gather to different interests, the talented faculty and the possibility to create a unique network of relationships with future leaders.
MBA Crystal Ball: Can you share some of the interesting and memorable experiences you had at MIT as a PhD student?
Professor Di Maggio: Something that really influenced me was the humility of the most senior and recognized scholars there, even the Nobel Prize winners.
They would take the time to hear us out, to teach us how to make our analysis more impactful and generally made us feel part of a larger family. That approach shaped my academic life enormously!
MBA Crystal Ball: What are the most important concepts in finance that every professional (not just MBA grads) should know about?
Professor Di Maggio: Definitely the concept of risk and diversification: too many people tend to naively compare investment with different risk characteristics (e.g. simply compare raw returns for index funds and hedge funds) and fail to understand the importance to diversify their investments (e.g. investing a large fraction of their savings in their national firms or even in the firms in which they work).
These seem basic principles, but in my experience even financial officers in medium and large firms have trouble following them.
MBA Crystal Ball: What are the top skills that recruiters look for in MBA grads for finance roles?
Professor Di Maggio: The ability to analyse large databases seem to be an essential part of the MBA toolkit, especially for those that want to pursue a career in finance.
MBA Crystal Ball: What are the top concerns that students have about pursuing a career in finance?
Professor Di Maggio: Most students are still under shock due to the crisis: some of them believe that positions in finance are very uncertain (more than those in other sectors), while other students also show ethical concerns about the inability to “produce something real.”
In any case, talking with employers it is clear that now even the most prestigious finance employers are facing fierce competition from tech companies and private equity firms for the best students.
MBA Crystal Ball: Which mode of teaching do you think works the best for finance topics and why?
Professor Di Maggio: In my opinion, the best combination is to show the framework that needs to be applied to the topic through a lecture and then use both case studies and simulations to show its applications.
The lecture methodology is extremely useful to provide the toolkit necessary to analyze the problem and provides a more general and abstract approach to the topic. It does not have to be boring and can still foster an engaging discussion with the students.
Case studies or in-class simulations can show the students how to implement those instruments and how to adapt to the details of each different situation.
MBA Crystal Ball: What can students without a quantitative background do before coming to campus?
Professor Di Maggio: Actually, I have found that students with a more qualitative background end up being at the very top of my quantitative class, so I do not think that the previous experience and background provides a big obstacle for students, as long as there is the effort and the dedication to deepen their understanding of those topics.
MBA Crystal Ball: How is the traditional classroom approach different from MOOCs for teaching finance theory?
Professor Di Maggio: I am a big believer that the continuous engagement with the professor and the discussions with the other students are essential to fully understand the theory, but more importantly to make the finance principles applicable in real situations.
MBA Crystal Ball: For professionals looking for a career in finance and coming from a completely different industry, which are the positions or roles that they could target? Are there any that may be more difficult to crack into without any past experience?
Professor Di Maggio: I do not see particular obstacles in pursuing a career in finance without having previous finance experience.
However, there are some positions that are slightly more difficult to target, for instance, usually the job market in Private Equity (PE) and Venture Capital (VC) is very network-driven, which create barriers to entry for those without experience (something that the MBA experience can compensate for though).
MBA Crystal Ball: What are the toughest challenges in finance that companies have struggled with, despite the enormous resources at their disposal?
Professor Di Maggio: Definitely the economic uncertainty they have been facing in the last few years: regulatory uncertainty for financial institutions, and economic uncertainty resulted from macro events, such as Brexit and monetary tapering, for non-financials.
MBA Crystal Ball: How does the process of valuing companies change based on the stage of growth they’re in? What are the common mistakes that VC’s do when valuing start-ups?
Professor Di Maggio: The most important aspect that changes over the life cycle of a firm is the amount of available information. At the very early stages, the valuation is really rudimental and driven by strong assumptions, because there is not a lot of information that can be used for the valuation.
However, one of the main objectives of a finance course is to discuss with the students the main assumptions driving these valuations and question the robustness of the valuation as these assumptions are violated.
In my experience, the valuation of early stages companies appeals to many students for its simplicity, but there is a risk of applying the formulas and ad-hoc tricks without fully understanding what are the underlying drivers of the valuation.
That is why I always prefer teaching my students how to build a DCF valuation even for young companies, to show them a different set of assumptions and a “sanity check” for their VC valuations.
MBA Crystal Ball: Gazing into the crystal ball, what are the top trends you see in the financial world in the next five years?
Professor Di Maggio: Companies will have to cope with a higher degree of uncertainty at the regulatory, economic and political level.
Their ability to operate in this different and more challenging environment will drive growth and opportunities for the younger generations in the next several years.