Open Book: How to Beat the Street Like KU
Earlier this month, when the University of Kansas won the NCAA basketball title, the Applied Portfolio Management program at the KU School of Business had extra reason to celebrate.
We support the team with an annual basketball scholarship, but in class we frequently use head coach Bill Self and the team as examples of the results of hard work.
Both the basketball team and the APM class have been extremely successful because of the work ethic of the players and coaches.
The Applied Portfolio Management program was founded in 1993 by Kent McCarthy, while he was on sabbatical from
Goldman Sachs
(GS) - Get Report
. Kent came back to his alma mater to bring students a different view of investing and to give them the hands-on experience of actually managing a portfolio. He donated $250,000 to seed the initial portfolio.
The class was a tremendous success. The students worked hard and learned what it takes to really manage money.
I started teaching the class with Kent in 2001. The portfolio is now $1.4 million.
The APM Philosophy
The APM philosophy is driven by
fundamental analysis and hard work.
Each week, students write up a case analysis to evaluate a new investment idea or re-evaluate an existing position in the portfolio. We focus on getting good ideas from a variety of sources, then evaluating those ideas from all perspectives. We want to hear the good and the bad, developing the bull
and
bear cases.
We also look for input from alumni and professionals who visit the APM class to discuss investment ideas with the students. Building our information network is an important part of the APM program.
The APM Book
In the summer of 2005, I presented a paper at a conference in Denver. Bill Falloon, an editor from Wiley Finance, was in the audience.
In the presentation, I mentioned the APM program and the portfolio. Bill went back to New York and looked the APM Web site. He was impressed with our long-term returns -- 20% compound annual growth rate (CAGR) since inception in 1993 -- and the transparency of our site. He then asked Kent and me whether we would be interested in writing a book to tell the story of the class.
The proposal appealed to us, but we weren't sure we had a whole book's worth of ideas. Once we put an outline together, however, we found we had plenty of ideas, so many, in fact, that the question became, "What should we leave out?"
Getting Close to the Information
In class and in the book
Applied Portfolio Management: How University of Kansas Students Generate Alpha to Beat the Street
, we emphasize that successful investing is hard work and that there really aren't any shortcuts to success.
We call lesson No. 1 "Getting Close to the Information." We want students to really understand what drives the business. We spend a lot of time in class getting students to critically sort through, identify and evaluate the most important information. We discuss the need to separate the hype and insignificant details from the real drivers of the business. The drivers might be an industry or a macro-economic trend or significant events in the company.
At the beginning of the semester -- and in the book -- we spend a lot of time on sifting out the insignificant details (the "ants on elephants"). We argue that this ability is one that separates successful investors from average investors.
Also important is understanding what drives the "average" investor.
If the average investor is a large
mutual fund, then being a small investor, like the APM class, is an advantage.
We
can look for mispricing in stocks that are unloved by the big mutual funds. Understanding the motivation of other market participants and how to use that information to your advantage is another key to successful investing.
The APM Story
In the book we use class examples to illustrate different points of the APM philosophy. The first section of the book provides a history of the class and contrasts the APM philosophy with other investment philosophies -- what we call "conventional wisdom."
We argue that conventional wisdom produces average results. To earn superior results, investors need to question conventional wisdom. Associated with that healthy skepticism is having the courage of one's convictions. The APM portfolio is in the same company as Warren Buffett and Lord John Maynard Keynes. In other words, we will
overweight our best ideas.
In the second section we discuss how to evaluate an investment and write a case study of it. We have lots of examples of our holdings and excerpts from different cases over the years. We discuss what worked, but we also talk about what didn't work and why.
The third and final section of the book concludes with a discussion of some specific themes that have been important in the APM class, such as investing in China, broader international investing, local investing and corporate governance -- to name a few. For these themes, we use lots of class examples.
Editor's note: To learn more about the APM program at the KU School of Business, read "How KU Stock-Pickers Play Offense" on TheStreet.com.
Plus, to put your stock-picking to skills to test, play TheStreet.com's Beat the Street game.
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