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Investing in Education and the Stock Market
Adjunct Professor Robert Goldberg with Adelphi benefactor and retired Goldman Sachs & Co. partner James Reilly |
Robert Goldberg, an adjunct professor in the School of Business since 2004, teaches students savvy investment strategies in his "Student Investment Fund, Seminar in Finance" course. Professor Goldberg, a former Wall Street investment banker, is currently a partner in Maritan Partners, a money management company, and part-owner of Advance Payment Services (APS), a credit card processing company. Using $100,000 donated from Adelphi benefactor and retired Goldman Sachs & Co. partner James Reilly, students in Professor Goldberg’s class were entrusted with proposing an investment strategy for the University. Given the recent turmoil in the financial markets, the students and Professor Goldberg faced the tough and crucial decision of how to protect their assets. Here are some excerpts of the class’s strategy:
Q: What is the students' perspective on the economy and market?
A: The students believe that the recession will not be severe, and that the economy will turn around by year’s end. They are concerned about the possibility of rising interest rates due to rising inflation and the Federal Reserve responding by raising rates. As a result, the students believe that a 50/50 stock and bond allocation is reasonable, and I am not going to disagree with them on that.
Q: How did students in your class decide on which stocks or funds to invest in?
A: The student fund was granted $100,000 at the beginning of the semester, and the class takes a long-term investment perspective. We divided the class into three sections. The students discussed and debated the proper allocation for the fund, and they decided to allocate 50 percent of the money to stocks, (which was invested in an S&P 500 index fund), and 50 percent to bonds. During the second section of the class, they decided to reallocate 10 percent of the overall (50 percent allocated to stocks) into Latin American, specifically Brazil and Mexico, (stocks). They reviewed different geographic regions around the world, and determined that the demographics (of that region) were particularly attractive. For the bond portion, the students reallocated a portion of the fund to both shorter term treasuries and inflation-protected securities to protect against inflation and rising interest rates. In addition, the class decided to reallocate a portion of the general bond fund into high-yield securities. They saw that as an attractive market opportunity since the excess yield on these higher risk bonds versus treasury bonds is at historically high levels. This difference in yield is referred to as the spread and this spread more than makes up for the extra risk of these bonds. Some of these (non-investment grade, higher risk) bonds include: Cablevision, Hertz, MGM Mirage, Ford Motor Company, General Motors, Rite Aid Corporation, LEER Corporation. The bond fund also includes investment grade bonds of companies such as Johnson & Johnson, IBM, GE, Wal-Mart, AT&T. As you would imagine, the risk of default is higher (on non-investment grade bonds) than the risk of default on investment-grade bonds, but as I mentioned, the extra spread compensates for this risk. During the last section of the class, the students will research and select individual stocks.
Q: How much discretion does the class have in making investment decisions?
A: The class does the research and decides on the investments. I provide a framework for analysis and review their recommendations. Once they convince me, then the next step is a presentation to members of the Investment Committee, including Vice President of Finance and Treasurer Timothy Burton and Associate Dean of the School of Business Rakesh Gupta.
Q: Why did students first invest in index funds, and then progress to choosing individual stocks?
A: The first part of the course was a broad economic discussion on stocks vs. bonds. The second part was drilling down into choosing what sectors they are interested in; the last part of the course will be the students researching specific stocks, and investing up to 10 percent of the (original 50 percent) allocation in up to 10 stocks. You want to make sure that (first) you have a good foundation and an understanding of the marketplace. You want some tension in the process. They debate in the class, and come to a consensus. They will be researching stocks in teams of two. This fund goes on past this first semester; the fall class will pick it up and evaluate what the students have done, and make any changes. I thought that it was better to slowly build the number of individual stocks. It’s a much higher hurdle to make an individual stock investment than a broad-based sector allocation. The students will have to work harder to convince me and those on the committee that their investments are sound. (Students) meet with (the) committee three times throughout semester.
Q: What tools did students rely on to choose their investments?
A: They look at the general business press- Bloomberg.com, Wall Street Journal, Barron's-plus they are using research reports provided by Merrill Lynch. I’ve suggested that they go to Morningstar as well. The guidance that I’ve given them is that I've provided a framework for the discussion and how one looks at stocks and bonds. It’s really providing a framework for how they look at the market. For the individual stocks, I've provided them a number of factors they need to consider, for example,—risk analysis, competitor analysis, financial analysis, and valuation.
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