The results from Institutional Investor’s
inaugural All-America Student Analyst Competition
give credence to the mantra that we always have to see both sides of a trade, and revealed the plethora of ways that traders can make money amidst the risk and chaos of the stock market.
Just under 700 undergraduate and graduate students participated in Institutional Investor's
competition, representing 34 colleges and universities. Each student was given $100,000 of virtual money and space on a dedicated server designed to replicate real market trading. The trades needed to be made between September 10, 2012 and January 31, 2013. In order to judge the winners, six investment factors were considered: net benchmark outperformance, volatility, balance sheet impact, net exposure impact, long alpha, and short alpha.
As Ben Baris, the Institutional Investor
writer who covered the competition, told Minyanville, “One of the interesting things I saw from the results is that there were so many different approaches that student took to produce solid returns.”
The overall winner, Daniel McAllister, an MBA candidate at the University of San Diego, acknowledging the nature of the short-term competition and his busy schedule, used a proprietary algorithm. Though Institutional Investor
did not release data for total return, McAllister's portfolio did have an average daily net benchmark outperformance of 0.28%. The overall runner-up, a University of Virginia undergraduate named Mahbod Matthew Olfat, focused on macro data and used triple leveraged ETFs to trade in and out of sectors. His average daily net benchmark outperformance was 0.32%. (See the full table of winners here
, and net benchmark outperformance results here
We asked Olfat why he chose this approach. “I’m no expert in business valuation," he told us via email. "Plus, that approach forces too much exposure to random change; one bad product or corporate scandal is enough to kill an entire portfolio. By investing in entire industries, you’re increasing your sample size, and so variance (read 'risk') goes down.”
Olfat accepts that trading on the stock market is an inherently risky undertaking, but as he said, “I was just able to avoid the type of risk that I didn’t want: risk from unpredictable corporate events.”
Of the 690 competitors, 141 had benchmark outperformance with their portfolios; 215 were approximately zero for outperformance; and 344 underperformed the benchmark. The Technology, Media & Telecommunications sector was most popular amongst competitors, with the five most traded tickers being Apple
(NASDAQ:MSFT), and Amazon
Two hundred students held a position in Apple at some point during the competition, making it the most heavily traded stock. Despite this, fewer than 20 students shorted Apple for its 23% drop during the duration of the competition.
One of the students who did short Apple was Simeon Iheagwam, who also finished first place in the tech sector. His strategy was to identify companies with strong positions in their respective markets or with strong growth potential. At first, he actively managed his portfolio, but after a few weeks, he stepped back and watched his portfolio’s performance based on his initial assumption about his chosen companies.
When he described it to Minyanville, his reason for shorting Apple was simple: “My decision to short Apple was based on public information or announcements that led me to believe that the stock price was going to decline.”
To get his win in the coveted tech sector, Iheagwam also was successful playing Facebook. “Their stock was trading far below the IPO price and I was aware that there was an announcement looming around acquisition or organic growth, thus I felt strongly that there was going to be a surge in the stock price on the anticipation of the announcement.” Sure enough, there was.
Iheagwam’s success speaks volumes about understanding the value of short selling to the professional trader -- yet overall, less than 30% of students in the competition even attempted a short sale. As Baris explained, “The fact that fewer than 30% of participants attempted a short position may speak to the lack of attention it is given in finance curriculums."
I can personally relate: As a novice trader myself, I have yet to engage in a short sale, or even consider one for that matter. But as Iheagwam illustrated, the short sale is a useful tool in any trader’s belt.
The competition's results also shed light on another major trend in financial education: specialization. Many students are encouraged to learn a particular sector so well that trading stocks in the category becomes second nature. As nine of the top 100 students were from University of Texas at Austin, Baris told us, “I spoke to the professor in charge there, Kelly Kamm, and that’s something they preach there: Get specific early.”
Thinking this way, it makes sense that Tech, Media & Telecommunications was the most traded sector amongst the students; young people have more specific knowledge in that field, in general, than in health care, basic materials, capital goods, energy, financials, or consumer goods. The generation that grew up as the Internet developed may prove to be most adept at understanding Tech, Media & Telecommunications stocks.
In any case, the results from the All-America Student Analyst Competition were encouraging, for the future of trading and for the individuals involved; the successful students generated strong returns not with ego or hubris, but by simply following the markets they found before them.
Daniel McAllister is finishing his MBA at USD while working full time as an consultant for the privately held technology company AXmentor. Mahbod Matthew Olfat is interning this summer on Wall Street at Morgan Stanley Fixed Income, and has plans to return to school and receive his master's and PhD degrees. Simeon Iheagwam has plans to work as a buy-side analyst before making the leap into starting his own investment fund.
Follow me on Twitter: @JoshWolonick and @Minyanville
Editor's Note: In the first edition of this story, Mahbod Matthew Molfat's name was given as Matthrew Molfat. Also, the specific location of his internship, Morgan Stanley, has been included.