Last fall aspiring financiers from across the U.S. logged on to a simulated trading desk for a chance to win Institutional Investor’s third annual All-America Student Analyst Competition. Flush with $100,000 in virtual cash, more than 2,000 students from 74 colleges and universities rode the waves of low interest rates, the Ebola scare and tanking oil prices as they battled to beat the Russell 3000 Index.
Taking top honors this year is Matthew Feldman, a senior at Baruch College in New York. Feldman participated in the competition as part of professor Bruce Kamich’s technical analysis class, where he learned different buy and sell signals. A die-hard value investor, the 23-year-old Honolulu native dumped more than half his capital into Southwest Airlines Co., enticed by an attractive price-earnings ratio, strong earnings and the expectation that low oil prices would ratchet up net profits.
“Stocks like Amazon that have a superhigh P/E ratio, I stay away from,” he explains. “I’d rather invest in stocks that have high value and a lot of potential.” Long familiar with his top choice, Feldman has held the Dallas-based air carrier in his personal portfolio since 2010.
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Apart from Southwest Airlines, Feldman put together a diversified book with holdings in the energy, financial, health care and retail sectors, domestic and abroad. His second-largest position was a 27 percent allocation to Main Street Capital Corp., a Houston-based private equity firm catering to lower-middle-market businesses. Feldman wanted his second-largest position to be a good income stock and picked Main Street for its stable price history and high dividend yield, he reports.
Using the Alphaseal software platform, developed by Stamford, Connecticut–based research services provider Mark My Media, these mock-portfolio managers could buy and sell stocks and index funds, use leverage and take short positions from September 2, 2014, through January 30, 2015. (Not all students placed their first trades on the same day.) To better simulate a trader’s responsibilities, the competition required participants to maintain a trade journal explaining their stock picks and also to comply with Regulation T, the Federal Reserve Board rule enforcing a 50 percent margin constraint on initial stock purchases. Violation of the rule taught students the perils of ignoring financial regulations as some were disqualified from the overall ranking.
“Every industry has its ‘chicken/egg’ paradigms. Alphaseal gives new entrants into the field an opportunity to prove their abilities before entrusting them with fiduciary responsibilities,” explains Roy Ophir, president of Mark My Media. “No one believes that trading a paper portfolio is the same thing as running actual money. However, verifiable track records are unavailable for most people in the industry (especially new entrants). We built a simulated trading platform that would mark portfolios to market on a nightly basis with independently sourced pricing data and statistical feedback that simulates a prime brokerage report. It’s a total immersion experience that has been quite popular with our system users and very effective for employers at verifying specific skill sets of entry-level candidates.”
While some got rich and others went broke, the Alphaseal platform graded participants based on six metrics: net benchmark outperformance, volatility, balance sheet impact, net exposure impact, long alpha and short alpha. The aggregated scores determined the overall ranking at the end of the competition.
In a win driven largely by the 56 percent return on his investment in Southwest Airlines, Feldman placed first in the overall competition in spite of having a long-only portfolio. “When you’re shorting, you can lose an infinite amount of money,” he says. “Unless you’re very confident or you know something that most people don’t, I wouldn’t do it.”
Feldman wasn’t alone in abstaining from shorting; in fact, only about 850 of the more than 2,000 participating students opted to short stocks. Finance professor Kelly Kamm of the University of Texas at Austin, who required her students to hold at least one short position, thinks undergraduates in general are nervous about shorting because they are less familiar with the technique.
“Undergraduates are still learning about how to hold long positions and invest, and they’re also trying to understand the effects of leverage,” she explains. “By definition a short position is using borrowed funds, so now you’ve got borrowed funds and a short rather than a long. So I do understand why for some undergraduates that can be a bit intimidating.”
In the words of legendary short-seller James Chanos, the founder of Kynikos Associates, a New York–based investment management firm known for its highly lucrative bets against Enron Corp., “Short-sellers are the professional skeptics who look past the hype to gauge the true value of a stock.” In that light, Josh Kohler — a recent graduate with a bachelor’s degree in finance from Philadelphia’s Drexel University — must be a master skeptic. Although he doesn’t finish among the top 100 students, Kohler is No. 1 in the short-seller competition, generating a remarkable short alpha of 467 basis points, more than three times the magnitude of second-place winner Mohamed Moawad and over five times larger than last year’s top shorter.
Kohler is a self-proclaimed contrarian investor, and his short book won big on its bets against camera developer GoPro, high-yield mortgage real estate investment trust Annaly Capital Management, retail giant Wal-Mart and electric-car maker Tesla Motors. Hailing from the Lehigh Valley in Pennsylvania, the 25-year-old is no stranger to the financial industry. Kohler conducted equity research for Berwyn, Pennsylvania–based money manager Turner Investments as well as the Dragon Fund, Drexel’s student-run equity portfolio. In the summer of 2013, he interned at Banco Sabadell, outside Barcelona.
“I love the risk-reward,” says Kohler of his career choice. “I love that it’s dynamic. I love that every day everything can be terrible or everything can be great. I just don’t like static environments where you know what you’re going to do every single day. I like being at the mercy of this huge market that can do whatever it wants at any time.”
Being evaluated on six performance criteria required participants to scrutinize their portfolio choices from various angles. UT Austin’s Kamm led her students to win the title of top school through conscientious stock picking. “Luck alone will never do it,” she says, explaining how investors must read the market environment and make a range of decisions regarding leverage, diversification and the size of their short and long portfolios. “You have to have skill, and you have to put effort into it.”
Since the competition’s inception, Kamm has woven it into the curriculum for UT Austin’s financial analyst program. Placing 20 students in the top 100 (up from two last year), UT Austin beats out second-place Baruch by four contestants. “If you’re going to place high in short alpha and if you’re going to place well in the overall competition or in the sector competition, you have to have some skill,” she says.
If that’s the case, then Jason Ayat, a first-year MBA student at Fordham University in New York, just validated his career change. Ayat ranks fifth in the overall competition, thirteenth in short alpha and third in the energy sector — a feat that makes it hard to believe that his bachelor’s degree is in journalism and he has no professional finance experience.
Ayat was born in Egypt, the son of a Lebanese executive in the finance department of Schlumberger, a Houston-based oilfield services provider. Owing to his father’s work, his family bounced around the world, settling in big oil production hubs: Dallas, Dubai, Paris, Houston, Jakarta and Singapore. Over the years he became fluent in three languages — English, Spanish and French — and developed a deep understanding of world energy markets.
“I’m definitely new enough to playing the investment game that I’m still most comfortable going after companies that I know,” he says. “I’m learning to look at other factors, but for me, I do have to know what the company does and have a good understanding of who they are.”
The 30-year-old took long positions in Southwest Airlines and Atlanta-based Delta Air Lines, expecting them to benefit from plunging fuel prices, while shorting oilfield services companies Halliburton Co. of Houston and Switzerland’s Transocean. Netting a 51 percent return on his short position in the latter stock clinched Ayat’s third-place spot on the energy sector ranking.
Baruch’s Kamich has observed a trend of students picking companies that recently held initial public offerings, such as social networking site Facebook, cybersecurity services provider FireEye and microblogging site Twitter. Undergrads, he says, often instinctively follow the mantra of Fidelity Investments’ Peter Lynch: Buy what you know.
“It’s important for them to disconnect, to understand that we’re not investing in the company, we’re investing in the stock,” Kamich explains, although he acknowledges the benefit of students starting where they’re interested. “It might have a wonderful story and we use the products, but it doesn’t mean that the bottom line is there and the earnings are growing. You have to be separated.”
Lynch’s Beating the Street was one of the first books on investing that this year’s overall second-place winner, Spiro Nanakos, ever read. The Drexel junior diversified his portfolio across sectors that he understood. Thanks to having a sister who is a biomedical engineer, Nanakos can talk biotechnology without stumbling over terms like “homozygous familial hypercholesterolemia.”
The 21-year-old from Goshen, New York, made a highly profitable bet on Carlsbad, California’s Isis Pharmaceuticals, which saw its stock soar 43 percent over the period. “They’ve been beating out all of their projected earnings-per-share for every quarter,” Nanakos explains. “They’ve been hitting milestones. They’re also partnering with other big companies like Biogen to work on the pipeline of products they have.”
Nanakos has been managing his own portfolio since he was 19, using money he made working in his father’s construction business. In the competition he got to try his hand at shorting and made a killing betting against Tesla. “With oil dropping, who’s going to want an electric car?” he asks. “Plus, they may be a rapidly growing company, but they’re very unstable. Their balance sheet isn’t as healthy as it could be.”
Earning a dual major in finance and construction engineering, Nanakos plans to start a career in private wealth management and possibly later transition into real estate development. After working in the construction industry since age 11, he landed his first internship in finance with New York–based brokerage National Securities Corp.
There is no secret formula for success in the student analyst competition. Those who landed in the top 100 employed a wide selection of strategies: Some were day traders, whereas others bought and held. Some owned diversified portfolios; others concentrated on specific sectors. Moreover, top performers come from diverse backgrounds in terms of education and work experience. “The ones who do well,” observes Baruch’s Kamich, “are the ones that are more passionate about it.”