Students studying Warren Buffett’s investment philosophy have picked 10 companies that they think he would like, and a special $50,000 portfolio fund at the University of Nebraska Foundation puts up the money to see if they’re right.
With Buffett’s concepts in mind, teams of graduate students at the university’s Omaha business school compile information about companies that might attract investments by Berkshire Hathaway Inc., the conglomerate that Buffett heads.
If a team’s research report earns a top grade, the portfolio buys shares in the company, using the donated money to give the students a real-life chance to invest like Buffett.
Since the investment fund started in the fall of 2013, seven of the 10 choices are in the red, including one that has dropped by half and two that are down by one-third. The biggest winner of the bunch has gained about 19 percent.
The 10 picks are “very Buffett-esque,” but it’s not easy to duplicate Buffett’s success, said Robert Miles, who has written books about Buffett and who teaches the class, titled the Genius of Warren Buffett. The University of Nebraska at Omaha class is part of the College of Business Administration’s executive MBA program.
“I don’t think most of them will beat Berkshire Hathaway,” Miles said, because Berkshire has more financial resources and decades of stock-picking experience by Buffett and his two money managers, Ted Weschler and Todd Combs. They spend hundreds of hours evaluating potential investments before making a choice.
“These students have had 36 hours of training,” Miles said. “They’re better off being an anesthesiologist or working for Gallup or the power company.”
As for the results so far, he said, “I would say, more time, please.”
The stocks in the fund will remain in the portfolio for at least 10 years. That’s in keeping with the long-term focus of investments by Buffett, an advocate of “the joys of compounding” who has said his favorite period for holding an investment is “forever.”
“You don’t flip these things,” Miles said. “You buy them and hold them.”
Andrew Gassman, who sells advertising for Cox Media, took the Buffett class in the fall of 2014 and graduated in 2015 with an MBA.
His Buffett team picked Cummins Inc., an industrial engine manufacturer, as a potential Berkshire investment. He believed in the research results so strongly that he bought shares of Cummins stock himself.
“It’s been a tough year for them,” he said, with the stock price down nearly 40 percent in 2015 because of a slump in global manufacturing. “It hasn’t done really well this year, but our investment was a long-term type of thing. I fully expect it to be a strong play.”
The team’s research was a good starting point, Gassman said. “It helped me immensely understand the value of a company and the methods of valuation, some of the foundational beliefs that Warren tries to use.”
But he said the students’ work was compressed to produce a presentation by the class deadline. “It may not be as much time as you would spend if it was your own money you were playing with. It’s always good to do your own research.”
The Genius of Buffett Fund was Miles’ idea, and he has donated $29,000 since it started. Others have made donations, too, including UNO Business Dean Louis Pol and his wife, Janet, and former students of the class.
Before the fund started, one of the student teams chose Deere & Co. as a Berkshire-style investment. A few weeks later, Berkshire announced that it had, indeed, purchased Deere stock.
“It was proof that it’s possible to teach Buffett’s methods,” Miles said.
The students look for companies that would meet Berkshire investment requirements, including factors such as being large, understandable businesses with high profits and having good management and durable competitive advantages.
Buffett says such characteristics are hallmarks of a company that can succeed over 10 or 20 years, or longer, and eventually its stock price will reflect its true long-term value.
Sue Kutschkau, a development director for the University of Nebraska Foundation, said setting up the fund to hold the investments was an exception approved by the foundation’s board of directors.
“Generally, when we get a stock, we sell it right away,” she said, and put the money into the foundation’s regular accounts. But because the Genius of Buffett Fund has an educational role, the foundation’s leaders agreed to let the stocks ride as a separate portfolio.
In promotional material seeking donations to the fund, a disclaimer says that the fund isn’t likely to outperform a low-cost stock index fund or Berkshire stock and that the university doesn’t recommend or guarantee any of the stocks in the portfolio.
Nor is the fund affiliated with or reviewed by Buffett or Berkshire, the university says, adding that the fund is “for educational purposes only.”
After 10 years, up to 10 percent of the portfolio will be sold, with the proceeds going to support the executive MBA program and the rest held to generate future support.
The cash and the stocks are held in a TD Ameritrade account, overseen by David Volkman, chairman of the college’s finance department.
Volkman said the shares’ performance so far has a lot to do with oil-related stocks and the declining price of petroleum, not with the analysis of the companies’ long-term prospects by the students, presented in reports of 40 or more pages.
“They do an excellent job,” he said. “Nobody has a crystal ball, but their long-term analysis shows that even though stocks may go down at some time, typically the good companies will come back.
“I expect after 10 years the portfolio will have a very attractive return. I have a feeling they’re not going to outperform Berkshire Hathaway, but it will be interesting to watch and see.”
The Buffett course attracts for-credit and noncredit students. In the spring, the sessions are scheduled around Berkshire’s annual shareholder meeting. Spring enrollment reflects the presence of shareholders who come to Omaha from around the country and from many foreign nations.
Volkman said teams with foreign students often write research reports about businesses that aren’t traded in the United States (like a Brazilian tugboat company). If shares of foreign companies trade in U.S. markets, they’re potential investments for the class.
Of the 10 investments so far, four are based in other countries — Ireland, India, South Africa and the United Kingdom.
Each semester, a trio of judges picks the team that makes the best research presentation. The winners split a $1,000 scholarship, also from Miles.
The fall 2015 class was small — four men and four women — and the men’s team won with its presentation about U-Haul’s parent company, Amerco. But the men’s tuition was paid through their employers or the GI Bill, and two of the women also had their tuition paid.
So the men deferred the prize to a woman who was paying her own tuition and to a single mother, who each received $500. Said Miles: “It was very moving.”
The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.
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Students in the Genius of Warren Buffett class at the University of Nebraska at Omaha used Buffett’s investing philosophy to pick these stocks. Shares, purchased using donated money, are to be held and dividends reinvested for 10 years. The returns are the percentage gains or losses since purchase. The fund also invests in Berkshire Hathaway Inc. stock, which is down 2.21 percent since the fund began.
|How their investments are doing|
|Based in London; explores, produces, processes and sells petroleum-based and energy products and services|
|Peoria, Illinois; manufactures and distributes equipment for construction, mining, transportation and industry|
|Express Scripts Holding Co.||18.78%|
|St. Louis; provides pharmacy benefit management services in North America|
|Dublin; manages power equipment for electrical, industrial, residential, hydraulic, vehicle and other markets|
|International Flavors & Fragrances||4.89%|
|New York City; creates, manufactures and supplies flavors and fragrances for consumer markets|
|Battle Creek, Michigan; manufactures and markets ready-to-eat cereal and convenience foods|
|San Francisco; delivers pharmaceu-ticals, medical supplies, health and beauty care products and health care|
|Principal Financial Group Inc.||-18.79%|
|Des Moines; provides retirement, asset management, insurance and related financial services|
|Johannesburg; operates integrated energy and petrochemical businesses|
|Tata Motors Ltd.||-39.73%|
|Mumbai, India; develops, manufactures, sells and exports passenger and commercial vehicles|
|Source: Genius of Warren Buffett Fund|