As investors across the globe grapple with the twin economic headwinds of inflation and rising interest rates, a small cadre of Columbia Business School students and alumni are embarking on their investment careers with quiet confidence.
That’s because the group has been running a unique investment portfolio based on the tried-and-tested principles of value investing pioneered at the school decades ago.
Designed and funded with a permanent $1.25 million gift by Thomas A. Russo, a partner at Gardner, Russo & Quinn, the 5x5x5 Russo Student Investment Fund was launched in 2015 as a real-world testing ground for investing in under-appreciated securities.
Run by students in the Value Investing with Legends course taught at the school, with ideas submitted by the students each year, the 5x5x5 fund is a unique learning experience that blends theory and practice. And the current market correction is an auspicious time to start an investment career, says Tano Santos, Faculty Director of the school’s Heilbrunn Center for Graham and Dodd Investing.
“Value investors are like firemen: we run to the fire when everybody else is running from it,” he says. Now, more than ever, it is important “to think deeply about the economics of the business, the operations of the firm, what drives value, what drives those business operations, and whether the shocks and disruptions are affecting the assets of the firm.”
Using real money undoubtedly sharpens the focus for students involved with their school’s model portfolio. Each year since the fund’s inception, participating students in the Value Investing with Legends course, taught by Santos with a guest lecture by Russo, pitch their best idea on where to invest $50,000. With as many as 106 ideas to review, Santos selects the top 25 to present to the 5x5x5 Investment Board, composed of Russo, Santos, and ten students whose investments are currently in the fund.
The 5x5x5 Russo Student Investment Fund’s board votes to select five pitches chosen as that year’s new investments. Each addition to the portfolio is then held for five years. During that period, students remain involved, collaborating with the board of the fund and evaluating proposed positions for two years as voting members of the board. At the end of each five-year period, investments are sold. Proceeds are split in two ways: An amount that reflects the initial $250,000 per year, adjusted for inflation, funds the upcoming year’s selection of five new positions. Any additional funds go to support financial aid scholarships at CBS, usually for value investing students from non-traditional backgrounds.
The value of value investing
Value investing has deep roots at Columbia Business School reaching back decades to when a finance adjunct professor named Benjamin Graham and a finance professor named David Dodd co-wrote Security Analysis, which they published in 1934. Together they advanced the idea that research and analysis can help ascertain a stock’s real underlying value. Their approach, or value methodology, helps unearth underpriced assets.
“The tools and techniques of value investing are applicable well beyond the traditional realm of the value investor, which is stock selection,” Santos says.
At a time of choppy markets, when other styles of investing (from index to growth and momentum) are showing their limitations, the rigor of analyzing undervalued assets could have renewed appeal beyond traditional value investors.
“Over the last decade, low interest rates and a higher appetite for risk have fueled a focus on growth investments,” Santos says. “Now that both things have changed — interest rates are on the way up and the appetite for risk is not what it once was — value is back. Investors are now looking more closely at the underlying quality of the business operations of the firm. Value never went away, but this market is more conducive to a successful value investing strategy.”
Case in point: Results from the 5x5x5 fund that has just finished its 5-year term, comprised of investments selected in 2016, rose a cumulative 133.5 percent over the five years. That result topped the S&P 500 Index’s return over the same period by over 30 percentage points.
Thanks to the recent sizable gains in the 2016 fund, the amount of money available for financial aid increased by over $290,000.
The multi-layered benefits of the 5x5x5 fund
Russo, who conceived of the idea for the fund, is also a charter member of the advisory board for the Heilbrunn Center for Graham and Dodd Investing, and feels strongly that the five-year investment term is necessary for a full educational impact. The longer holding period is an essential proving ground that offers students — and later alumni — the chance to experience both the highs and lows of gains and losses over time.
“That is why the discipline of holding positions for five years becomes so important,” says Russo. “It is instructive to see investments enthusiastically made that fail to fully capture the future that was promised when those investments were made five years earlier.” (Learn more in Q&A: Thomas Russo on Value Investing)
The best lessons learned for investors involve those businesses which, over time, end up failing for lack of competitive advantage, mismanagement, or poor financial management. In the 5x5x5 program participants are asked to return to campus periodically to describe the evolution of their investments, either positively or most importantly, negatively. Investing is, after all, filled with lessons of humility.
Student participants are not only present on campus during their selection in early years, but will ideally return to Columbia over the ensuing years, keeping an energetic eye on the investments they pitched and engaging with other 5x5x5 participants. Current students are keen to gain insights about the investment experience and careers of the returning alumni.
All in all, the 5x5x5 Russo Student Investment Fund brings together hands-on investing experience under the guidance of leaders in the field with networking opportunities and a payoff that benefits students in need – a unique set of benefits for students at Columbia Business School.