When it comes to teaching value investing, nothing beats real-world experience. But unsurprisingly, not a lot of students have the spare capital required for the practice. Thomas Russo wants to change that at Columbia Business School.
To help form and nurture the next generation of value investors, the industry titan has donated $1.25 million to found the School’s first student-led value-investing portfolio, the 5x5x5 Student Value Investment Fund.
“‘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,” says Russo, Managing Member at Gardner Russo & Gardner LLC and advisory board member for the Heilbrunn Center for Graham & Dodd Investing. “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.”
The fund is named 5x5x5 for its unique structure. Five students each year will be selected to participate based on the strength of their proposed investments. Investments selected should be capable of delivering compound returns over a five-year holding period. Finally, investments should be supported with clearly expressed, understandable, and brief (no more than five) reasons.
Ideas for the stock selections will come from students in the spring “Value Investing with Legends” course, co-taught by Professors Bruce Greenwald and Tano Santos. Professor Greenwald selects the top 15 student recommendations and submits them to the fund’s investment board, which votes each year on five new $50,000 investments to be included in the portfolio. Each of the following four subsequent years, five new investments are added, for a total of 25 investments by the end of the fifth year. After the end of the five-year holding period, each selected investment will be liquidated to provide funding for future 5x5x5 fund participants to invest. The monetary amount to be deployed in year six and beyond will be increased to adjust for inflation, with any additional profits, realized upon liquidation, to be used for Columbia Business School student scholarships.
“In investing, you learn by doing,” says Mallory Downing ’15, whose recommendation of Cummins Inc., a power and automotive equipment manufacturer, was chosen 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.”
Mr. Russo also requested that each student participant make a five-year commitment to return to Columbia each year to personally interact with newly selected student managers. Group meetings are intended to enrich student learning in two ways. First, current-year participants will present their ideas to a gathering of former student participants (totaling 20 once the program is fully up and running), receiving positive and, even more importantly, negative feedback from prior-year participants. Second, all students will gain deeply instructive insight when prior participants offer brief updates on the ongoing performance of their recommendations. Each new class of student investors “will have the benefit of hearing from original sponsors of earlier portfolio selections why investments have or have not performed according to original expectations,” says Meredith Trivedi, administrative director of the Heilbrunn Center. “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.”
Further, interactions between current and prior fund participants are intended to provide strong networking potential for those interested in careers in global value investment management.
The 5x5x5 fund’s board comprises Thomas Russo; Professor Greenwald; Meredith Trivedi; and the 10 students with the most recent stock picks in the portfolio. (The students join the board after their stocks are selected and remain on the board for two years. Since the fund began this year — meaning there are only five students now invested in the portfolio — the other five students currently on the board were peer elected.)
“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,” says Downing.
Russo, a graduate of Dartmouth College who received both his law and business degrees from Stanford University, says he chose Columbia Business School for this project because of its strong legacy of value investing — and the stewardship it entails.
“There are very few places where I think the proper tools are given to business school students to handle the responsibility of [investing for the longest term],” he says. “Investment funds run by students typically fail . . . because they typically just focus on investments popular for the short term. For most programs, it is just about finding the fastest way to get maximized near-term results. Positions are sold at the end of each term, allowing subsequent student participants to engage in their own short-term portfolio trading. That way of investing reinforces all the worst conduct on Wall Street. Most importantly, subsequent student participants never gain the benefit of learning from their predecessors’ investment mistakes.
“By contrast, the value investing legacy is deeply observed in the coursework at Columbia,” Russo continues, pointing out that his son, Christopher Russo ’11, is a graduate of the School. “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.”
To see the full list of the first year’s portfolio investments and learn more about the 5x5x5 fund, please visit https://www8.gsb.columbia.edu/valueinvesting/node/177.