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SMU's Top Manager Competition Prepares Students For Wall Street

This article is more than 8 years old.

People have paid millions to have a single lunch with Warren Buffett. So what is it worth to take a semester long class on investing from a teacher with an outstanding track record like Warren Buffett’s?  Southern Methodist University in Dallas, TX offers just such a class taught by Professor Joseph Dancy. With graduations just around the corner, I checked in with Professor Dancy to learn how a great investor prepares students for careers in the money management industry.

Over the past 10 years, Joe’s Marketocracy model portfolio has returned a little more than 16%, which compares well with Berkshire Hathaway’s return of about 10% for the same period.

Ken:  Joe, can you tell me about your students this semester?

Joe:  I taught 2 groups of students this semester. The first group was comprised of 17 undergraduate students who were selected to manage the SMU Spindletop Fund which is a real-money energy sector fund. The second was an energy and environmental law class where the students’ career goals were more diverse.

Ken:  How do you prepare your students for careers in the money management industry?

Joe:  This semester, I used Marketocracy to run an investment competition in which students were required to come up with a compelling strategy and then make some trades and explain the results. As with most classroom investment competitions, the student with the highest return is declared the “Top Gun.”  But, in our case, on the last day of the competition, I asked the students to allocate a hypothetical $100,000 into the portfolios of their fellow students and the person who got allocated the most assets was named the “Top Manager.”

There is a big distinction between the Top Gun and the Top Manager (Photo credit: Joe Dancy)

Ken:  Why do you make such a distinction between the Top Gun and the Top Manager?

Joe:  I do it because succeeding in the investment world depends as much on your ability to explain your strategy and decisions as it does on your returns. Everyone expects that you can’t succeed if you have bad returns. But it is not as obvious that you also can’t succeed even if you have great returns if you can’t explain how you got them.

Ken:  What were some of the strategies that your students came up with?

Joe:  Many of the student managers of the Spindletop Fund took advantage of their extensive research in the energy sector and the feedback from our Fund oversight panel of investment bankers and hedge fund managers to allocate a majority, if not all, of their Marketocracy capital in the energy sector. In January, The Spindletop Fund students forecasted higher crude oil prices as the quarter progressed which they thought would spark a major rally (from depressed lows) in energy equities when the competition began.

While making an energy sector bet many students realized that the stocks of smaller companies make larger moves more quickly (are more volatile/risky) and allocated funds to small and microcap firms that are under-followed. The share price of these small firms were more adversely impacted by the crash in oil prices in the fourth quarter of 2014, so they were expected to recover strongly as oil prices stabilized and increased. Using this strategy some students allocated funds to small and microcap firms in the technology and biotech sectors also, with less success.

Ken:  Did the strategies change as the competition progressed?

Joe:  The underperforming students realized that they needed substantial gains toward the end of the investment period and tended to make more risky positions in an attempt to ‘catch up’ with the better performers. In most cases this strategy did not work well. One participant attempted to game the system by trading on Marketocracy’s delayed quote system using a live data feed. His takeaway was do not trade when you are desperate, in the end he underperformed the S&P 500 index.

Ken:  How did your students do?

Joe:  The three month semester is much too short to test an investment strategy. Only over a longer period of time can a student enhance their skills with ‘defined practice’ (the ’10,000 hour rule’ discussed in Gladwell’s ‘Outliers” or some of Dr. Andressen’s research on expertise). The ending statistics (alpha, beta, Treynor ratio, R squared, etc.) are all probably not statistically significant so decisions made on this data most likely will be flawed, or at the best random. My multimillion dollar LSGI Fund portfolio has been actively managed for almost 16 years now and the statistics for alpha, beta, R-squared and the like are still not ‘significant’ from a statistician’s standpoint. The joke is once you find a manager who has been around enough to generate statistically significant excess returns (alpha) they will be retiring – or dead.

Ken:  What were the major lessons learned?

Joe:  Only seven students outperformed the S&P500 ETF during the contest period. No student manager who underperformed the S&P 500 ETF received any funds to invest from other students at contest end. This points out two things: (1) it is difficult to be an active manager, even in a sector that is doing well, and outperform the major market indexes (which means this skill should be highly compensated), and (2) if you can’t outperform the benchmark index the investor attitude seems to be that an index tracking fund is a better decision from a risk/reward standpoint.

Ken:  So who was the Top Manager?

Joe:  This year’s Top Manager is Nicholas Spain whose portfolio was up 27.86% and attracted 32% of the amounts allocated by his peers. Interestingly though, Charles Landon whose 14.21% return ranked him #3, got the 2nd largest allocation of 27% from his peers. Caswell Prewitt, the student who ranked #2 with a return of 22.82% received the 4th largest allocation of 12.5%.

Ken:  Turning to the students now, how did Professor Dancy’s competition prepare you for a job in the investment industry?

Nicholas:  As someone who is very interested in working in the investment industry after I graduate, this competition prepared me by providing an opportunity to practice and work on my skills, while also building a successful track record, which I can now show to potential employers as a way to distinguish myself from other candidates.

Charles:  Because the competition was over such a short time frame, we had to find winners that were going to perform right now. In the investment industry, you need to find investments that are going to give you above average returns over a longer timeframe. With oil markets getting crushed in the fall and the winter, it was clear to me that many of the E&P companies in these core areas of the best U.S. basins were an opportunity to make a quick return. In the investment industry, your job is to make a return on your investors money, and mock situations like Marketocracy gave me a great opportunity to prepare for the real deal.

Caswell:  The Top Gun contest spawned competitiveness among our Spindletop group, and greatly improved our research skills. While my portfolio predominately comprised small-mid cap energy companies, I always tried to stay open to ideas that weren't in my comfort zone but had similar growth potential. Much like the real world of investing, we could see the numbers and ratios of our competitors, but never really knew what they were holding. This taught me to stick to my guns and map out a pace I was comfortable with rather than chase the leader. It was a great time to uncover undervalued energy companies, and focusing on that sector proved a successful strategy.

Ken:  Could each of you tell me what stock is your best idea right now?

Nicholas:  My best stock idea right now is SM Energy (NYSE:SM), an independent oil and gas exploration and production company. Since the start of the Marketocracy competition, SM has been my best performer, with a 73.74% inception return. However, I still believe, and many of the analyst reports I follow back this up, that SM is still drastically undervalued, and could rise another 75% in the future. SM looks to be one of the best investment opportunities in the Energy sector right now.

Charles:  Callon Petroleum (NYSE:CPE), is one of my favorite companies in the Permian. First of all, the company has not taken on much debt, so they are in less trouble than many of the E&P producers if oil markets collapse again. Also, they are in one of the best areas in the Midland basin, in the Wolfcamp & Spraberry plays. With many companies being undervalued right now, there is not only an opportunity for Callon to make a great return, but there is also the possibility of CPE getting acquired. Callon can still make great return even at $50 oil, which is a reason I'm so strong on them. Looking forward, I see prices recovering to in $70 range going into 2016, which gives the stock strong upside heading into 2016 as well.

Caswell:  I am going to have to go with Clean Energy Fuels (NASDAQ:CLNE). T. Boone Pickens holds around a quarter of the company, and the share price crashed with oil. Even at the low point of the recent oil price drop, compressed natural gas still beat out diesel by nearly a dollar per gallon for transportation fuel. As CLNE expands infrastructure, I am confident the market will reward them when the CNG-Diesel spread widens once again, further incentivizing trucking companies to make the switch for their fleets.

Ken:  I understand you are all juniors this year.  What are you going to be doing over the summer?

Nicholas:  I will be an intern at Texas Capital Bank this summer, working in their Energy Commercial Banking group.

Charles:  I'll be interning at a private equity firm in Dallas, EnCap Investments.

Caswell:  I am going to be working as the investor relations summer intern at EnLink Midstream.

Ken:  Thank you Joe, and congratulations to all of you.

My Take: Investment competitions are a part of many finance programs. What makes SMU’s competition unique is that the top manager is not necessarily the one with the highest return, but the one who attracts the biggest allocation from his fellow students. This puts the emphasis on coming up with a compelling strategy and clear explanations for performance. These are important skills that often take portfolio managers years to develop.

By helping his students develop these skills, Professor Dancy has provided them a key advantage in the competition for jobs in the investment industry. The fact that the top 3 students all have summer jobs in the industry speaks volumes in favor of Professor Dancy’s teaching methods.

All 3 of the students I talked to were juniors this year.  If they maintain their Marketocracy model portfolios, they will have an 18 month track record by the time they graduate.  At 18 months, their track records will still be short, but they will be 18 months longer than almost all of their competitors for Wall Street jobs.

If you are a student who would like to participate in a similar competition, click here to let me know. If I hear from enough students, I’ll set up and host the competition on Marketocracy.

Joe Dancy is a Marketocracy Master whose portfolio is available to clients of Marketocracy’s Separately Managed Account program. You can view his top five holdings, learn more about his strategy, and track his progress with monthly Performance Insights emailed directly to you at the end of each month by visiting our website.

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Disclosure: I am the portfolio manager for mutual and hedge funds advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.