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Discipline, Logic and Value Produce Investment Success

Each year the Texas Investment Portfolio Symposium (TIPS) brings together more than 40 universities to learn from industry professionals and participate in different competitions. Recently, my Texas Lutheran University students participated in the TIPS Portfolio Managers Competition in which the students outline and defend their investment philosophy, decision-making process and substantiate their long-term investment results.

It was a great opportunity for the student managers of Bulldog Investment Company to stand toe to toe with the MBA programs from Rice, Tulane, Baylor and the University of Dallas. From inception, Bulldog Investment Company was designed to teach students the techniques, strategies and disciplines used by Warren Buffett in his legendary management of Berkshire Hathaway.

Their approach is simple to understand, but often difficult to successfully implement.

Kelli Gohmert, from Yorktown, led off the presentation stating they look for companies that are predictable and consistent over long periods of time. Furthermore, they must be understandable. Gohmert explained that if a company is not predictable, consistent and understandable—you have little hope of assessing a rational value to it.

Investing is a discipline that starts with valuing a business. A thorough analysis of the income statement, balance sheet and cash flow statement are mandatory. Additionally, any potential investment must have an identifiable “sustained competitive advantage” allowing their asset to grow for long periods of time. Gohmert emphasized the importance of long-term thinking stating “We have no idea where the markets will be in the next two or three years. However, owning well-run businesses over the next ten years is probably the best way to maintain and increase your purchasing power.”

Gohmert finished by saying whether they own one share or 1,000 shares, their approach is to behave as if they own the whole company. This mindset focuses on the long-term merits of ownership and filters out much of the daily noise.

Ernest Stephenson, from Hitchcock, was up next explaining Buffett’s Rule #1—Lose No Money. Since the program’s inception, the student managers have incurred one realized loss of $34 and only have one unrealized loss of less than $500—despite the fact that their portfolio is north of $300,000 and fully invested.

Much of this success has come from constantly looking for good management with an ability to reduce costs, increase profits and reinvest those profits to create even more opportunity. This got the judges attention as they all recognized how much easier investment management is if you are not in a hole.

Lastly, Arthur Munoz, from Schertz took the stage explaining their goal of focusing on their best ideas. Munoz stated it is far better to have a laser focus on your 20 best ideas as opposed to owning several hundred names. In doing so you must focus on what is known as opposed to what is unknown or might be.

Furthermore, you must avoid leverage. Borrowed money does not make you right or wrong—but it magnifies the amount by which you are right or wrong. Munoz added that borrowed money is the number one reason why people and nations fail.

When the judges asked Munoz how the team views risk and volatility, the student said “The wise investor should embrace short term volatility in exchange for long-term gains.” Additionally, he offered that volatility does not equal risk. In fact, short term volatility can often misprice assets, and in the process lower risks for the long term investor.

As the trio concluded their presentation and answered questions from the panel of professional judges, they said there is nothing sexy about fundamental analysis, however, the numbers will tell a story about the quality of any company. This, combined with discipline patience and logic, offers tremendous opportunity for success as an investor or a business person.

For their effort, the student investment managers from Texas Lutheran University earned second place beating Rice, Tulane and the University of Dallas. Not a bad outcome for a bunch of undergrads. Somehow, I’m not too worried about them finding permanent employment upon graduation.

Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.

Originally published March 4 2015, Victoria Advocate