Though “The Wolf of Wall Street” makes stock trading look like fun, business students at USF are learning the real world pressures of investing over $300,000 in a real-world setting.
Throughout the school year, the Student Managed Investment Fund will present stocks to finance professionals who may decide to invest in the picks with money raised by the USF Foundation and the College of Business.
USF Professor Joseph Mohr, former owner of a financial consulting firm, said the class gives students the experience of a first-year market analyst at a professional firm.
“We really stress that we expect our analysts to stop thinking like students and start thinking like professionals,” he said. “Part of this is developing an informed opinion about the market, economy and stocks.”
Students examine news reports and company data to make predictions about different business sectors and the overall economic forecast. Students then compare notes and analyze all the information to predict what companies the market undervalues.
“If the market has the price higher than what the stock should be, then you shouldn’t buy it,” Mohr said. “If the market has the price lower than what the stock should be, then you should buy.”
Students learn not only to analyze the behavior of markets with formulas, but how to analyze the behavior of themselves with heuristics.
“We overestimate our own abilities, and we don’t like to change our beliefs,” Mohr said.
According to Mohr, there are cognitive trap doors that investors often fall into, such as overconfidence, risk aversion and conformity.
“We tend to fall in love with stocks and we hold onto them too long,” he said. “We teach you in here not to overestimate the precision of your forecast.”
Mohr said a naive investor is one who invests in companies solely because they like the brand. Students must often consider companies with “scars and warts.”
“Just because it’s a good company, doesn’t mean it’s a good investment,” he said. “If it’s undervalued, that’s where you’re actually going to make money.”
Gerardo Lopez, a senior majoring in finance, said it is this level of critical thinking that makes market analysis the most interesting job in finance.
“You make a lot of money working on Wall Street, but at the same time, it’s like a game,” he said. “You have all these players out there trying to find the best ways to make money, and it’s all about being clever.”
Mohr said the point of the class is that it is possible to beat the market, despite all investors having the same available information. It’s about forming a better opinion and approaching the data creatively.
“The great thing about investments is that everyone has their own philosophy,” Lopez said. “There’s no set way. It’s very open to creativity.”
There are two ways to look at a stock, Mohr said: top-down and bottom-up. A top-up investor looks at the trends and works down to underpriced companies. A bottom-up investor focuses on an individual company before considering larger trends.
Bianca Rodriguez, a senior majoring in finance, said she spends at least 40 hours a week brainstorming and crunching spreadsheets to find undervalued companies in energy and healthcare sectors.
“I’m looking at things that are always in demand,” she said.
Lopez said he is instead looking at what could be in demand in the future, such as defense contractors or cyber-defense companies.
“Increasing conflict geopolitically may lead me to companies that haven’t really been looked at in the past couple of years,” he said.
While everyone dreams of finding the diamond in a coal mine, such as Google or Netflix, professionals must have data to back up the story before presenting it.
“In the business world, it’s not about hunches,” Lopez said. “People are investing billions and they need security.”
In six meetings throughout the school year, the class will pitch stocks to an advisory board to consider and give feedback.
“We tell the advisory board not to be nice and to treat them like real employees,” Mohr said. “We want real feedback like in the real world.”
Students and the advisory board members will then vote on what stocks, if any, should be bought for the portfolio that has existed since the first class, in 2010.
Students then monitor the stocks until they feel the stocks have become fairly valuable on the market, then the stocks are sold and the cash is eventually reinvested.
Mohr said the portfolio, which includes 16 stocks such as Activision Blizzard and Hershey, has consistently outperformed the Standard and Poor’s 500, a stock market index considered the best indicator of the overall U.S. stock market by the National Bureau of Economic Research.
The portfolio assets were valued at $234,959 at the start of 2013, $339,732 at the start of 2014 and are currently worth around $360,000. Assets will stay in the fund for future classes to reinvest. If the course ceases to exist, Mohr said there would be a discussion about what to do with the assets.
“It’s one thing to read something in the newspaper or in a textbook,” Rodriguez said. “It’s another to apply in the real world.”