It’s every investor’s dream to outsmart the S&P 500 and, bada bing, bada boom, sail a personal yacht to a private island. And it’s most investors’ comeuppance to learn that the markets are extremely hard to outsmart; for every Apple, there seem to be a hundred Enrons.
One adage students of investing quickly learn is that sometimes randomly generated portfolios can outperform the experts. Give a monkey enough darts and it will beat the stock market. Another is that it is impossible to consistently outperform the market index, a theory known as the “Efficient Market Hypothesis.”
To test these ideas, Bellarmine instructor Carl Hafele created the “Stock Market Challenge,” a 2010 investment competition in which his Investment Theory 351 students tried to beat the market, as well as some randomly generated and celebrity-picked portfolios.
But Mr. Hafele added a bit of a thrill to the game by putting up $40,000 of his own money. Not only were his students playing with actual greenbacks, they also had to go up against the stock picks of Lilly Bauer, the 7-year-old daughter of Rubel School of Business Dean Dan Bauer. Game on.
“My primary purpose is to get senior finance majors totally immersed in the stock market,” said Mr. Hafele. “You shouldn’t come out of a great organization like Bellarmine without managing money.”
He divided his students into four groups and gave each group $10,000 to invest for two months in September 2010. Their mission: to outperform a group of challengers: the S&P 500, the random picks of Lilly Bauer, another team comprised of Business School administrative assistants Carol Huff and Janet Russell, and the public portfolios of TV talking heads on Fox and CNBC.
The students had to perform a technical analysis of each investment, learn the fundamentals of the stocks and convince their teammates of the worthiness of their picks. That meant finding companies that were trading at a discount to their fair market value by doing extensive analysis of the companies’ fundamentals.
“They do a lot of evaluation work – how expensive or cheap these stocks are relative to their peers and their historic norms,” he said. “We also do a lot of technical analysis, charts and graphs, to help you find better entry and exit points to individual securities.”
The students also had to keep minutes of the meetings in which they made their picks. Besides being great fun, the competition brought to life the real world of institutional asset management, where money managers try to beat the S&P 500 index.
This is a pursuit Mr. Hafele knows well. Before coming to Bellarmine to teach economics and finance, he was the CEO and portfolio manager at National Asset Management, an institutional money-management firm managing over $20 billion. With over 25 years experience in investments, marketing and management, he is also the managing director and principal at Lanier Asset Management and a financial consultant at First Kentucky Trust Company.
His love for investing rubs off on his students. “I’ve been investing since I was 18, but Carl has really helped me find my passion for investing and getting involved in the markets,” said Richie Dvorak, a junior economics and finance major from Batavia, Ill.
And the students got hooked on the project. So much so that another business professor lamented that they were neglecting their other studies. “They got bit by the bug – that’s the whole purpose of the thing,” said Mr. Hafele.
So how did the students do? The group collectively earned 13 percent on their $40,000 investment, slightly bettering the 12.8 percent return earned by the S&P 500 index. One team earned an impressive 20.4 percent, which significantly helped the overall class outpace the market. Coming in next at a whopping 12.7 percent gain was Lilly, followed by CNBC’s Jim Cramer at 12 percent, Fox at 10 percent and the Business School assistants at 8.8 percent.
“Lilly did the best among the outside challengers,” said Mr. Hafele. “She beat Cramer and the secretaries and the Fox experts too. But the S&P beat ’em all.
“But Lilly beat the experts. The point is, don’t listen to the experts. If you’re hearing it on CNBC or Fox News, the cat’s already out of the bag.”
Mr. Hafele knew he had a hit on his hands, so he made the project a regular feature of his investment theory course. The Stock Market Challenge is now in its fifth year of reinvesting his original $40,000. In years when the students make money, they donate the profits to charity. In the one year the students lost money, Mr. Hafele made another cash contribution to bring the kitty back up to $40,000.
After four years of the project, he teamed with his Rubel School colleague Michael Luthy to report on the research. Their paper, “University Students as Portfolio Managers: Performance Versus the Market, Experts, and Random Selection,” appeared in the Academy of Educational Leadership Journal in 2013.
According to the paper, the students “learned the importance of top-down macroeconomic analysis and diversification strategy, the ability to conduct fundamental investment research, signal monitoring of The Federal Reserve, consideration of transaction costs, sell disciplines, technical analysis, economic cycles and more.” And, presumably, that all of that will help you beat a second-grader by three-tenths of a point.
Last year, the project blossomed into a full-fledged registered student organization, The Bellarmine University Investing Club. Richie Dvorak is its current president. “We have about 20-25 active members. Seven members make up the investment panel, who have hands-on access to managing and trading our portfolio,” he said.
The club now manages the investments of $100,000 of the Bellarmine Univesity endowment under the supervision of Mr. Hafele and Bob Zimlich, Bellarmine vice president of finance. All investments benefit the endowment, and club expenses are funded by the Student Government Association, Mr. Dvorak said.
“In order to run an efficient, diversified portfolio, including coverage in all the different sectors and different asset allocation – equities and fixed incomes, such as bonds – you need more than $10,000,” Mr. Dvorak said. “So we ran a mock portfolio of $100,000 and ended up beating the S&P 500 by more than a percent and a half.”
The success of the mock portfolio and the enthusiasm of the students impressed the endowment investment committee into letting the club manage $100,000 ($90,000, plus $10,000 donated by Mr. Hafele), of the Bellarmine endowment fund’s real money.
“With Centro [a new, three-story building that will house the Rubel School of Business] coming in, we’re hoping to have a Bloomberg room, so we thought it was really critical for Bellarmine to have a student-managed portfolio – that really offers hands-on experience you don’t get from the classroom,” Mr. Dvorak said. “And that all came out of Carl’s Stock Market Game from his investing class. Our mock portfolio showed we know what we’re doing, that we have a track record.”
The students were confident they could persuade the committee to let them manage the money, but that didn’t mean it wasn’t a stressful pitch. “It was by far the most important presentation I’ve had to give in my life so far,” Mr. Dvorak said, noting that the committee included members of Bellarmine’s Board of Trustees and the consulting firm that manages the endowment fund. “This entire process has been one of the best experiences I’ve had and I couldn’t have done it without Carl’s help.”
Mr. Dvorak and his fellow club members are now focused on ensuring the future of the club by attracting younger students. “This semester, five of the seven investment panel members are seniors, so we worked out a shadow program to find people who are interested in being on the panel in the future so it’ll be a smooth transition from semester to semester passing it down to underclassmen,” he said.
He has confidence in the club’s ability to manage their portion of the endowment. “We’re killin’ it, man. We’re beating our equities. We’re outperforming the market by 1.3 percent. We’re really trying to add value. Low-risk companies trading at a discount to their fair value – that’s where we really build our wealth.”
Which is probably even better than a 7-year-old could do.
Jim Welp ’81 | firstname.lastname@example.org