Where should you go to business school if you want to pursue value investing? A new student-led fund at Columbia Business School (CBS)—established with a $1.25 million donation by investment guru Thomas Russo—makes the New York City MBA program a good bet.
Value investing—the philosophy favored by Warren Buffett, among others, of buying undervalued assets and then exercising patience as their long-term fundamentals reveal greater value—can be hard for MBA students to grasp in a tangible way in the two short years they spend in business school. Indeed, most academic research suggests that value investing works best over the long run.
Russo, a student of Buffett’s, wants to help groom the next generation of value investors, and so he’s created the 5x5x5 Student Value Investment Fund to give MBA students the real-world experience he believes is required.
“‘Five by five by five’ arose from my long-held belief that students ought to have an opportunity to derive deep and lasting lessons from student investment funds,” Russo, who is a managing member at Gardner Russo & Gardner LLC and an advisory board member for CBS’s Heilbrunn Center for Graham & Dodd Investing, said as part of an article on the CBS website. “The biggest lessons occur over time. [The fund is] trying to get investors’ horizons stretched out beyond five minutes, five days or even five quarters. I want the 5x5x5 portfolio to succeed and underscore the message that long-term investing is actually a worthy and profitable pursuit.”
Russo says he chose CBS for the project—and not his own alma mater Stanford GSB—because of the the school’s strong legacy of value investing. Indeed, the investment paradigm was developed by CBS Professors Ben Graham and David Dodd in 1928.
The fund’s name reflects its unique structure. Five students each select funds based on their ability to deliver compound returns over a five-year holding period—providing five (or fewer) clear, understandable and succinct reasons for their choices.
“In investing, you learn by doing,” Mallory Downing, MBA ’15, said as part of the news article. Downing’s recommendation of Cummins Inc. (CMI), a power and automotive equipment manufacturer, was one of the five selected for the first year’s portfolio. “A lot of our coursework is pitching stocks, but we’ve never actually put money behind them. We haven’t had to live with them. This is different. Sticking with your investment for five years takes a lot of work. It’s dealing with the ups and downs. It’s so much of a learning experience.”
Downing’s recommendation, along with 14 others, were selected by Professors Bruce Greenwald and Tano Santos as part of their spring course, “Value Investing with Legends.” The fund’s investment board voted on five of the 15 to receive $50,000 investments and be included in the portfolio. In addition to Downing, the board also chose Patrick Enriquez Fisher, MBA ’15, for his selected position in John Deere (DE); Oystein Kvaerner, MBA ’15, for his selected position in the Weir Group (WEIR); Richard Taddonio, MBA ’15, for his selected position in Qualcomm (QCOM); and Brian Waterhouse, MBA ’15 for his selected position in CDK Global (CDK).
In each of the four upcoming years, five new investments will be added, so that the fund will ultimately be comprised of 25 total investments. When each selected investment reaches the end of its five-year holding period, it will be liquidated to provide funding for future 5x5x5 fund participants to invest. Investment amounts in year six and beyond will be increased to adjust for inflation, with any additional profits will help fund scholarships for Columbia Business School students.
As part of participation in the fund, Russo has asked that each student commit to returning to CBS each year of their investment’s five-year holding period to personally interact with newly selected student managers. Current-year students will benefit from learning how the selections of prior students performed and also receive constructive feedback on their own selections.
“We hope students will learn to be long-term investors with the full benefit of hindsight as to what has worked and what has not worked from investments selected by their predecessors,” Meredith Trivedi, administrative director of the Heilbrunn Center, said in the CBS article. Networking opportunities between current and prior fund participants will also prove useful to those interested in global value investment management careers, the school hopes.
Russo, Greenwald and Trivedi, together with 10 students, will make up the 5x5x5 fund’s board. Eventually, the students will be those with the most recent stock picks in the portfolio, but since only five students have so far invested, the other five currently on the board were elected by their peers.
“The opportunity to sit down with people like Tom Russo and Bruce Greenwald and have such personal attention is very, very rare. Learning from investors like them, on a very intimate basis, has been an unparalleled opportunity,” Downing said.
Russo hopes the unique nature of the fund will give business school students an opportunity to learn what it’s like to invest for the long term. “Investment funds run by students typically fail . . . because they typically just focus on investments popular for the short term,” he said. Driven to find the fastest way to maximize near-term results, positions are sold at the end of each term, which means that subsequent students then engage in their own short-term portfolio trading. “That way of investing reinforces all the worst conduct on Wall Street,” Russo said. “Most importantly, subsequent student participants never gain the benefit of learning from their predecessors’ investment mistakes.”
Russo, whose own son, Christopher Russo, is a 2011 CBS graduate, reiterated his admiration for the school’s value investing legacy. “I wanted to respect Columbia Business School with this gift for the great [education] that has been offered to so many people I have revered within the value investment community over so many years,” he said.