Fun with Stocks and Bonds

For many students, college is a time to become fiscally independent. Many open their first checking account. Some apply for a credit card. Others are offered the opportunity to manage thousands of dollars on behalf of their university.

“Nothing beats hands-on experience when it comes to learning investing,” says Jeff Pippin, senior vice president and chief investment officer.

As such, the Pepperdine Office of Investment Management has donated $250,000 of real dollars from the University’s endowment for students in the Applied Portfolio Management course at the Business Administration Division of Seaver College. While finance professor Levon Goukasian oversees the process, it’s the students who ultimately make all the investment decisions.

FINANCIAL $TATEMENTS

"Do not allow your emotions to control your investments. Emotional trading can be the ultimate downfall of an investor." Marcia Garcia

"Current markets are very volatile and every equity investment is risky. Investing preferences should depend on your view of the state of the economy." Vuk Vojinovic

"When one chooses to buy stock, remember that one is actually buying a part of the company and not just an abstract ticker symbol. We must truly believe in a company if we choose to buy its stock." Davy Huang

Sound crazy? Pepperdine is hardly the first to implement a student-managed investment fund. As of 2007, 288 universities in the U.S. had more than $390 million under student management. The University of Wisconsin’s Applied Security Analysis Program is one of the nation’s biggest; its students managed $62 million in 2008.

The majority of these programs, however, target graduate-level MBA students. “Having undergraduate students investing and managing real money is not very common in other schools,” says Goukasian, who believes his students will have an edge when applying for coveted finance jobs. “It makes them think in real terms. It is as hands-on as it gets.”

The program began four years ago as a single class using simulated investment dollars. Since then, Goukasian has developed it to include two courses, created guidelines for using the new funding, and earned approval by the Investments Committee of the Board of Regents. “The idea is that over time the fund would grow from a combination of investment returns and support from donors, alumni, and potentially, financial services firms and money managers,” Pippin says.

Admittance to the course is by application only for students in the Business Administration Division with prerequisite classes and grades. “We discuss current events and from there go where the finance world takes us,” says senior Vuk Vojinovic. In addition, students complete multiple projects in which they learn risk management, diversification, portfolio construction, and correlations. “The projects are very rigorous,” Goukasian says, explaining that students use sophisticated analysis models and have access to Bloomberg’s information service.

One such project gives each student $100,000 of simulated money to invest. “Everything looks real, so they get the feeling of what it takes to buy and sell stocks,” Goukasian says. The rankings are public, so the students monitor their own and each other’s progress. A small percentage of their grade is based on portfolio performance, but Goukasian notes that losing money is the best lesson. “Because the market fluctuates, over 12 weeks they will undoubtedly have ups and downs,” he says. “At the end of the semester, I see a huge change in their mentality. Now they understand risk and are prepared to take action to manage it.”

Senior Marcia Garcia says she gets up at 6:30 a.m. when the market opens on the East Coast to check her stocks. “Now when I’m at the gym, instead of watching MTV, I’ll flip the channel to CNBC,” she says.

By the second semester, the students have a thorough understanding of how to make studied, shrewd investment decisions. Each is assigned two industries in which to gain expertise. They choose a few companies in that industry and conduct an elaborate analysis. Finally they present their recommendations to the board—their fellow classmates.

“We have lively and honest discussions when we’re critiquing each other’s stock picks because we understand how important it is to leave a good mark,” says senior Benyam Mekonnen. “That pressure hits home. Instead of seeing someone else have success or failures on TV, we feel it personally everyday.”

Currently there are nine students in the class, and in January they made the first purchases using the fund, totaling $50,000. The portfolio includes stock in various industries, including health care, manufacturing, chemicals, financials, equipment, materials, and energy. “We bought solid companies which we believe have great potential,” says Goukasian, who notes that the students made ethics-driven decisions and chose only socially responsible companies.

“Dr. Goukasian uses his personal experiences to show us how it’s not just about making the biggest return but having satisfaction in the work that you do,” Mekonnen says.

While the students and Goukasian monitor the portfolio everyday, their performance goals are long-term. The hope is to eventually reach $1 million, at which point a scholarship and funds to attend conferences will be made available to students. Goukasian says the real bottom line is his students’ employability after graduation. “Of course we would like the fund to grow, but the main objective is student learning.”

And he sees that learning everyday. “The students call, e-mail, and come in at all hours of the day. They are so excited, wanting to share something with you or get your feedback. I’m happy to do it,” he says with a smile, “because it excites me too.”