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Thomas Russo and Professor Emeritus Bruce Greenwald at the official inception of the 5x5x5 Student Investment Fund.
The Unique Vision and the Student Participation in the 5x5x5 Russo Student Investment Fund
Unique idea behind a student stock portfolio fund
The idea for a student fund where a limited number of stocks are held for a long time, reflecting the value investing tradition was that of Thomas Russo, partner at Gardner Russo & Gardner and manager of the Semper Vic investment partnership. Russo guest lectures each year in the Value Investing with Legends course and is on the board of the Heilbrunn Center for Graham and Dodd Investing. He designed and funded this first-ever student investment fund at Columbia Business School in 2014.
What does 5x5x5 mean
Russo explained in an interview in 2015, that “Students ought to have an opportunity to learn more from student investment funds and from the grim review of the shortfalls of most funds that are in practice today. ‘5x5x5’ simply means to have five investments, with no more than five articulated reasons for each investment and then hold those investments for five years.” With 5x5x5, after five years there will be 25 investments in the portfolio, “so there will be plenty of occasions to learn important lessons from those investments over time.”
At the end of five years, the original amount, accounting for inflation, will be invested back into the 5x5x5 Fund and the remainder of any gains will be used to support current-use scholarships for students interested in investment management. As alumni, program students will remain active managers of the 5x5x5 Fund, continuing their support of, and connection to, the Heilbrunn Center and Columbia Business School.
Students and alumni participation in 5x5x5
Ideas for the investment portfolio are submitted by students in the Value Investing with Legends course and ultimately selected by the 5x5x5 Investment Board.
When the students’ ideas are selected for the portfolio, they become voting members of the Board for the following two years and select which positions will go into the portfolio during that time. After their two years on the voting board, they roll off and are solely responsible for reporting on their stocks if there are any major changes to the thesis. They are strongly encouraged to attend 5x5x5 events to create a network of participants within the larger CBS investing network. These students also return to campus to speak to the current students about their idea in the portfolio, why they liked it at the time and any lessons learned to date.
As the positions are sold after the five-year hold period, the Heilbrunn Center hosts a reception for all of the participants. The first sale (Spring 2020) will also kick off a “lessons learned” series of notes and articles. The initial work for each investment is listed below and will be revisited annually and upon each sale:
Align Technologies (ALGN) - Michael Wooten ’19
Aon Plc (AON) - Freda Zhuo '20
ASML Holding NV (ASML) - Shradha Mani '21**
Atlassian (TEAM) - Rainbow Chik '21*
Avalara (AVLR) - David Windslow '22*
Axalta Coating Systems (AXTA) - Damian Creber ’16
Becle, S.A.B. de C.V. (BMV: Cuervo) - Michael Allison ’19
Booking Holdings Inc. (BKNG) - Jeffrey Johnson ’19
CCL Industries (CCL.B) - Lilia Noack ’18
CDK Global (CDK) - Brian Waterhouse ’15
Charter (CHTR) - Will Husic '22*
Cintas (CTAS) - Tanya Kostrinsky '20
Costco Wholesale Corporation (COST) - David Faulkner '18**
Cummins (CMI) - Mallory Downing ’15
Dollar General Corp. (DG) - Audun Nordtveit ’17
Entegris (ENTG) - Pablo Tolosa Villaseca '22**
Fidelity National Financial, Inc. (FNF) - Ted Bealin ’17
Gruma (GRUMA B) - Ryan Albert '21*
Howden Joinery Group Plc (HWDN) - Adam Schloss ’18
JD.Com (JD, ADR) - Anji Lin ’18
John Deere (DE) - Patrick Enriquez-Fischer ’15
MasterCard Inc. (MA) - Michael O’Byrne ’16
Mohawk Industries (MHK) - Neethling McGrath ’19
Moody's Corporation (MCO) - Christopher White ’16
MSCI (MSCI) - Harrison Liftman '22*
Nike (NKE) - Nielsen Fields ’17
Nuance Communications (NUAN) - James Shen '20
O'Reilly Automotive Inc. (ORLY) - Derek Johnson ’16
Otis Worldwide Corporation (OTIS) - Stephanie Moroney '20
Paypal (PYPL) - Rodolfo Zeiidler '20
Paycom (PAYC) - Nathan Shapiro '22*
Qualcomm (QCOM) - Richard Taddonio ’15
Rollins, Inc. (ROL) - Winter Li ’19
Rolls Royce (RR) - Lauren Harmon ’16
Sabre Corp. (SABR) - Joanna Vu ’17
SYSCO Corporation (SYY) - Windsor Cristobal ’18
The Sherwin-Williams Company (SHW) - Alexandra Cowie ’17
The Weir Group (WEIR) - Oystein Kvaerner ’15
Vestas Wind Systems (VWS.CO) - Andreas Helland '21*
Yum China (YUMC) - Leo Pertsovsky '21*
* Denotes current voting member of the 5x5x5 Fund Board. The 2020 Board will also include Tom Russo, Tano Santos, and Meredith Trivedi.
**Denotes that the write-up is not included at the request of the author
Why this student fund is different than others
Russo explained why the structure of the fund is different than others he has seen. “The kind of prototypical student-run portfolio today, whether it is undergraduate or graduate, or whether it is PhDs, I suspect, is basically a process whereby a group of people is formed around interest and, upon election, they immediately set to work selling everything that was in the portfolio prior to their appointment. They have exactly seven weeks to fill up the portfolio with investments and then it is quite clear that within the next three months, their work will be done.”
Russo continued, “Now, the biggest lessons that occur in such a setting would be those lessons that occur over time and that is why this discipline of holding for five years becomes so important, because the greatest lesson is to watch something that seems so inexorable crash and burn, especially if it is a very slow-moving car wreck. And you will watch the author of the idea, the person who is going to be driving the car wreck, and they will have an opportunity to account for themselves and the lessons of humility that surface from such an experience is far more instructive than the person for whom a rented share in Apple happens to go up 12% during the seven weeks in which they were actually committed in capital.”
The students who then become alumni who participate, “have to have the capacity to do absolutely nothing blissfully for a very long period of time and that is a skill that I think comes with age. When you are starting out, all things look possible and then, over time, you start to slow down. “ said Russo.
Columbia Business School’s special role as the home for 5x5x5
“As part of the curriculum taught through the Heilbrunn Center at Columbia Business School, the value investing legacy is deeply observed in broad coursework and is at the very core of the Value Investing Program at Columbia. Since applied learning is at the core of the Heilbrunn Center, Columbia Business School was the natural place to make such a unique commitment,” explained Russo. “There are no better places that have the legacy of Benjamin Graham and Warren Buffett, literally the birthplace of value investing.”
Russo would like the students at Columbia to take away the best advice he ever received from a mentor that led to your success. “Well, I would just go back to this concept of the ability to do nothing. I mean, that just seems to be so underrated, and then the power of compounding. But, the hardest thing is to do nothing for very long periods of time and that is probably the strongest strengths.”
Tom Russo’s Philosophy
Russo believes that there are very few places where the proper tools are given to student investors to handle the responsibility of long-term investing. “In the case of this Student Investment Fund, 5x5x5, serious money will be committed from the beginning and there is a serious beneficiary at the end of all of this, which is, student scholarships.”
The concentrated portfolio, “is certainly something that has been in practice in my life and it reflects something that Warren Buffett suggested when I was a student in business school in the 1980s, that you do not have that many good ideas across a career.” Russo is adamant that if any analyst cannot explain the purpose for an investment off a couple of very, very powerful forces, that investor is probably not getting a strong enough signal about that investment in that particular market.
Russo’s philosophy about long-term holdings started in the 80s. He explained. “I think as early as 1982 when I first met Warren Buffett, his comment was the ideal holding period is forever, implying that you should take advantage of the one break that the US government gives investors and that is the non- taxation of unrealized gains. Buffett described how, without triggering the gain, over time your compound is taking place on money borrowed from the US Treasury, enhancing the return on your personal commitment of capital. If a position remains unsold and is leveraged up by the taxes otherwise owed, the investment compounds them both and you leverage up your returns. But this approach requires the hardest thing, which is finding a business that has the ability to reinvest so that it can continue to justify your capital over long periods of time.”
Connecting this philosophy with the 5x5x5 fund, Russo said that “A five-year horizon allows you to get to the outcome where you have business forces working for you and you will make your way through the choppy and disruptive markets. But, if you do not stretch your horizon out, you will probably fail to identify strong enough characteristics to carry the capital forward profitably.”
Russo has been executing on his philosophy for several decades; he has been a partner at Gardner Russo & Gardner since 1989. The firm has over $5 billion under management, and he oversees $4 billion as general partner of Semper Vic Partners limited partnerships, as well as in individually managed accounts. Prior to joining Gardner Russo & Gardner, Mr. Russo was at the Sequoia Fund. Mr. Russo is a graduate of Dartmouth and has an MBA and JD from Stanford.
Louisa Serene Schneider '06, former senior director of the Heilbrunn Center, interviews Tom Russo regarding the 5x5x5 Fund. Read their conversation here.