Peter Thiel and the Higher Education Bubble

Apr. 13, 2011 8:09 AM ET15 Comments
David Pinsen profile picture
David Pinsen

On TechCrunch yesterday, Sarah Lacy wrote about her conversation last Friday with billionaire hedge fund manager and venture capitalist (and former Credit Suisse (CS) derivatives trader) Peter Thiel, who famously invested in PayPal (which was later acquired by eBay (EBAY)), Facebook, and LinkedIn, among other successes. Lacy quoted Thiel on higher education:

"A true bubble is when something is overvalued and intensely believed,” he says. “Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It’s like telling the world there’s no Santa Claus."

Lacy adds:

Like the housing bubble, the education bubble is about security and insurance against the future.

Which may be true, but it elides a perhaps more significant similiarity between the housing bubble and the education bubble, one I noted in a blog post a few years ago:

As with housing, spending on higher education has been fueled by cheap credit facilitated by a government sponsored enterprise (Sallie Mae, in the case of higher ed). As with housing (up until the burst of that bubble), all this cheap credit has led to higher prices (interestingly, politicians who call for increased spending on higher ed every election year never seem to consider that this increased spending may have helped drive up tuition costs).

Later in her TechCrunch article, Lacy supports Thiel's statement that talking about an education bubble is taboo:

[W]ith education, there’s barely any counter-narrative at all, because it is rooted in the most elite echelons of the upper class.

That's not quite true. In the blog post I linked to above, I pointed to three writers who had questioned the value of higher education earlier in 2008: Charles Murray, in The Wall Street Journal ("For Most People, College Is a Waste of Time"), the pseudonymous community college instructor "Professor X" in The Atlantic ("In the Basement of the Ivory Tower"), and James Altucher in the Financial Times ("College a waste of time and money for kids").

In 2009, others made similar points about higher ed, e.g. Kathy Kristoff in Forbes ("The Great College Hoax"). There was even a skeptical article about the value of higher education in the Chronicle of Higher Education that year, by Joseph Marr Cronin and Howard E. Horton ("Will Higher Education Be the Next Bubble to Burst?").

Of course, recognizing a bubble and profiting from it are two different things. Thiel's plan to profit from the bubble is to award $100k grants to 20 talented teens to skip college and start businesses instead. Given his track record, one wouldn't be surprised to see the next Yelp (another of Thiel's successful venture investments) come out of this cohort. Even here, though, Thiel wouldn't be the first to plan on profiting after recognizing the education bubble.

In 2009, hedge fund manager Jim Chanos was short DeVry (DV), Grand Canyon Education (LOPE), ITT Educational, Strayer Education (STRA), and Universal Technical Institute (UTI). Last year, hedge fund manager Steve Eisman (famous for shorting the housing bubble, as recounted in Michael Lewis's book, The Big Short) announced he was also short the for-profit education sector. As it happens, Short Screen subscriber "Hesperian" had mentioned on the message boards that he was shorting the education bubble (via Strayer and DeVry) last April.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

This article was written by

David Pinsen profile picture
I developed the hedged portfolio method of investing at Portfolio Armor, and I run a Marketplace service at Seeking Alpha based on it called Bulletproof Investing.

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