A year ago, I wrote about my Texas Lutheran University students’ performance at the Texas Investment Portfolio Symposium (TIPS) Managers Competition. This competition, sponsored by the CFA Institute, includes universities from Texas, Louisiana and Oklahoma. It is the largest CFA competition of its kind in the nation.
Last year, the students representing Bulldog Investment Company, and TLU, took home first place as they impressively outlined their process, analysis and results in managing a real portfolio (no simulations). Then they had to field difficult and challenging questions from a panel of practicing professionals.
With a new team this year, the hurdles were large. However, Texas Lutheran successfully defended their title defeating the MBA programs from Baylor, Texas State and the University of North Texas.
The TLU program is designed to teach how to read and interpret financial statements. This skill is in large demand by for-profits and non-profits, alike. Furthermore, the students must take this knowledge and use it to manage a $500,000 investment portfolio in the manner Warren Buffett uses in managing Berkshire Hathaway.
Elaborating upon comments made last year, the following is worth sharing.
Experts often say you should buy an index fund; you cannot beat the market. For the past 10 years, this student group has beaten the market, meaning it is possible. However, it is very difficult. The student’s portfolio has grown more than 15% per year, cumulatively outperforming the market by fifty-four percentage points since inception. That is significant wealth creation.
To deliver this performance, you must understand how businesses make money and what sustained competitive advantage they possess. Fundamental analysis, and business valuation, are crucial. A stock is a business, not a ticker symbol and a valuation is not a stock price or just a P/E ratio.
You must be disciplined and hardworking in knowing what you are looking for. You must dissect a company from head to toe. In the process, you must distinguish between good and bad. You must be literate in analyzing financial statements as well as identifying qualitative aspects of strength and success. You cannot shoot from the hip and hope for success.
If you want to beat the market, concentrate money in your best ideas. Two companies comprise nearly 30% of the student portfolio. When they saw value, they backed up the truck. Then they let it grow for years.
By letting winners grow they developed deeper knowledge in the companies they own. This also lowered turnover, commissions and taxes. As such, the level of compounding is greater.
Don’t be afraid to say, “I don’t know.” The students liquidated three positions last year. Two had mediocre performance and the students determined they did not have a deep enough understanding to make informed decisions. The third company was facing serious litigation. The students could not determine the outcome of the litigation. They liquidated in favor of better (and easier) decisions.
You must be willing to run into a “burning building” when you see opportunity. On December 24th Bulldog Investment Company placed three trades which comprised about 20% of their portfolio. The market had been in free-fall the entire month, dropping 15% in three weeks.
In doing their homework ahead of time the students knew exactly what they wanted to buy and at the price they were willing to pay. One month later, these investments produced a gross return of more than 20%…more than 240% annualized.
Volatility is not risk. As stock prices dropped in December, the students recognized that revenues and profits were not being impacted. As such, greater volatility made a well-researched investment more attractive.
When the news media, social media or people in your life tell you the world is collapsing, have the composure to think independently and critically. In the process, be emotionally stable and patient.
A long time-frame and tremendous patience is mandatory. The stock market does very irrational things over completely unanticipated times. However, great businesses make money in good markets and bad.
Never stop learning as success and knowledge are cumulative. We stand on the shoulders of giants. Be cognizant and appreciative of those that paved the way.
Congratulations to Andrew Leal from Edinburgh, Esam Hijazi from New Braunfels and Caleb Bronnenberg from Schertz for bringing home top prize to Texas Lutheran!
(Left to Right: Esam Hijazi, Andrew Leal, Dave Sather, Caleb Bronnenberg)