Wall Street on the Farm

The Blyth Fund is real money managed by students.

May/June 2010

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Wall Street on the Farm

Photo: Rod Searcey

Many students play the Stock Market Game in high school economics classes, building portfolios with virtual cash to learn the ins and outs of investing. At Stanford, students can manage the investment of real dollars.

On a Monday night in February, directors of the Charles R. Blyth Fund listened to a proposal to buy shares of the burger chain Steak 'n Shake. Apart from the venue—an unused classroom—and the jeans and T-shirts the students wore, the vibe wasn't so different from that of a real-world investment group.

Among the University's training opportunities for would-be financiers, the Blyth Fund provides the most practical experience. About 20 fund members manage a portfolio of securities worth more than $140,000, almost twice the 1978 founding grant of $75,000. Most of the portfolio is invested in 15 securities, from Silicon Valley giant Intel to Warren Buffett's famous holding company Berkshire Hathaway. Even in down years, the Blyth Fund typically outperforms the S&P 500. (See graph.)

The fund serves as a small income source for Stanford's endowment—Blyth bylaws stipulate that one-quarter of each year's capital gains goes to the University's general fund. But the fund's main stated purpose is to "provide a new educational experience to a group of students interested in finance and investment." Any student can apply to become a voting member of the fund; only undergraduates can serve as directors.

"There is definitely personal attachment to the securities in the portfolio," says Patrick Hayes, one of two fund co-presidents from the just-finished 2009-10 fiscal year. "If you're the one who proposed it, you tend to take ownership of the position." This makes the Blyth Fund an invaluable learning tool, but it has also made the recession a particularly difficult experience. The fund lost over a third of its equity between April 2008 and March 2009, falling from just under $170,000 to about $108,000 before climbing back to its current position.

"We want to grow the fund and be good stewards of our endowment," says Hayes, '11. "So when certain positions perform extremely poorly, which pretty much every position was doing, pretty much everyone was feeling bad about the whole thing."

That isn't to say the recession was a wholly negative experience. Investing in the recession taught members valuable lessons about stick-to-itiveness.

"The greatest learning experiences from investments were from mistakes," Hayes says. One was a $5,000 loss from stock in collapsed bank Bear Stearns, whose demise demonstrated that professionals make errors, too. Blyth members can absorb those lessons early, when the stakes are lower.

They also learn more than investment basics. With lots of cash and little oversight—an annual meeting with representatives from the Stanford Management Company and with Student Activities and Leadership is about it—the fund could turn into a playground for irresponsible investors. It has in the past.

The group spent lavishly on social events for several years before 2008, regularly turning in annual expenses in the $10,000 neighborhood. And it used to hold shares of the Vice Fund, a mutual fund invested primarily in guns, gambling and alcohol. Raffi Mardirosian, a 2008-09 fund co-president, called the behavior "a microcosm of the financial industry."

More recently, the Blyth Fund has toned down its Gordon Gekko-ish impulses and focused more on educating its members. The directors dumped the Vice Fund early in 2008 and have reduced yearly expenses almost tenfold. "There's more of a willingness to sacrifice some returns in order to better educate the club," Mardirosian, '10, says. "The principal goal is to raise money for the University and to educate students, and we weren't fulfilling that goal."

That is why the fund now holds a relatively small number of securities. Hayes and co-president Erin Parker, '11, cut Blyth's holdings to 15 early in their tenure to maximize the influence of individual stocks and keep members closely involved. "That way, everyone knows what we have and everyone can follow it a lot more closely," Hayes explains.

A week after Hayes helped present Steak 'n Shake to the group, the fund directors turned the proposal down in an informal vote, putting the company on a watch list for future purchase if the price drops. Hayes says only seven to 10 proposals (out of some 20) are successful each year, but the rejected pitches still have value. The fund is about education, after all. "That process is the experience people are looking for," he says, "and that's what they get the most from."

SCOTT BLAND, ’10, is an intern at Stanford.

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