Editor’s note: Dave Sather, in addition to serving on the Business Bank of Texas board of directors and running a financial planning group, leads an internship program at Texas Lutheran University in Seguin, Texas. The program, Bulldog Investment Company, teaches TLU students about sound investment principles. This year, the participating students competed in the Texas Investment Portfolio Symposium (TIPS) and won top honors.
In the article below, Dave shares some of the investing principles that helped his students win the competition, which are valuable for the average investor to keep in mind as well.
On paper, it could have been a modern version of David versus Goliath. Texas Lutheran University, a small NCAA Division-3 school from rural Seguin, Texas battling the dominant D-1 schools. These were undergrads tackling some of the smartest MBA students in the country.
That was the backdrop as the TLU students of Bulldog Investment Company presented their research and portfolio management skills at the Texas Investment Portfolio Symposium (TIPS) Managers Competition.
Bulldog Investment Company, now in its 10th year, was originally designed to teach students how to read and interpret financial statements. If an individual is skilled at analyzing data, they can determine if a company is strong or weak and more importantly, the reasons why. This skill is in demand whether in nearly every sector.
Additionally, students must expand this ability by researching investment ideas that conform to Warren Buffett’s criteria in his management of Berkshire Hathaway.
To make the learning experience deeper and more tangible, students work in teams. They must research the financials, identify the sustained competitive advantage around a business and then value the business based upon numerous metrics. These ideas are presented to a professional board of directors on a regular basis.
Winning presentations are funded with real cash, and it is managed exclusively by students. Since its inception, the student managed portfolio has produced returns of more than 15% per year.
TLU students have submitted their work to the TIPS competition three times in the last five years. Each time they have been a top 5 finalist, previously placing 3rd and 2nd. However, this time the Bulldogs defeated Baylor, Tulane, Texas State and the University of North Texas to take top honors. To say I am proud of my students is a complete understatement. I’m ecstatic. Not only are these students intelligent, but they work hard and are incredibly humble.
From this ongoing experiment, there are several key takeaways for the average investor:
First, do your research. Understand how a business makes money and what its sustained competitive advantage is. Is the competitive moat surrounding the castle getting wider and deeper, or is competition tearing down the walls?
If you want to beat the market you really need to concentrate your money in your best ideas. If you do the research, then diversification is highly overrated, as it dilutes your best ideas.
Fundamental analysis, and an understanding of business valuation, are crucial. A stock is a business, not just a ticker symbol. Furthermore, a valuation is not a stock price or just a P/E ratio. Successful investors must value a business on a historical basis and make logical assessments about the future of any entity.
Volatility is not risk. Risk comes from the permanent impairment of capital. If the stock market falls by 1,000 points, it has little bearing on the number of sodas sold by Pepsi. However, the long-term value of the beverage maker is determined by their cumulative long-term sales and earnings. Greater volatility can actually make a well researched investment more attractive.
A long timeframe and tremendous patience are mandatory. The stock market does very irrational things over completely unanticipated time frames. A great business will make money in good markets and bad.
Hard work, persistence and humility are necessary to do appropriate research and make good decisions. Few industries are as competitive or ever-changing as investment management. The pace of evolution in the investment world never stops. The successful investor must never stop learning.
Capitalism, with a fair playing field, is a tremendous opportunity for wealth creation.
Good education is not exclusive to big universities or big cities. The same is true for great investors. Logical investors—whether they’re on Wall Street or in Seguin, Texas— spend their time reading and thinking critically about business models in order to make the best decisions.