The stock market is in some ways a promise land - a place where any individual, of any wealth, can try their luck in the financial markets. It is romanticized in rags to riches stories, idolized by millions of students, and open to anybody who has as little as $100 to invest. It is no surprise that the stock market is the first place profit-seeking academics flock to when they think they understand consumer behavior. I recently had my own idea (I guess I joined the bandwagon too) to see if I could beat the stock market.
A little background
I’m chair of UT’s VIP Distinguished Speaker Series, a program that hosts CEOs of Fortune 500 companies to come and speak to thousands of students each year. The event is open to the public and the speakers come pro bono. As chair, I had the pleasure of meeting with Dan Hesse (Sprint CEO) and Richard Anderson (Delta Air Lines CEO) before they gave their lecture. I was simply amazed by their perspective, methodology, and passion - their vision was inspiring and I (instinctively) had a lot of faith in what they were doing in their respective industries. Without realizing it, I was completely sold on the future success of these companies.
And Then It Got Me Thinking…
Does the fact that the CEO agreed to be a part of the program indicate anything about their company? After all, I don’t think a CEO would agree to be in the program if their company was in financial trouble - their time is incredibly expensive. I needed a way to test if CEOs coming to the program was a signal of their company’s performance. Could I trade stocks based on the timing of the event? Because the program has been around for 20 years, more than 100 speakers have come and I have plenty of data to test my theory.
Building A VIP Stock Portfolio
I started simulating stock trades based on when speakers from publicly traded companies participated in the series. I would time my trades based on 2 principles:
- Buy: 6 months prior to the speaker’s event date (usually the date which we secure the speaker/they agree to come)
- Sell: 18 months after event, this is plenty of time for the company’s health/situation to change, let’s sell while the CEO still feels good about his company.
UPDATED: Some of you have asked me how speakers are chosen. VIP Student Committee and I choose roughly 200 CEOs to invite for the year. They range all industries and are usually Fortune 500; we pick them solely based on how interesting we find their company and career. Of all 200+ people we invite, usually only 7-10 of them accept the invitation. This is the “signal” the title of this post refers to.
This type of strategy resulted in 66 buy and sell transactions dating back to 1994. The full list can be seen here.
From the graph above, it’s evident that VIP performed better than the markets most of the time and particularly on rallies. Let’s take a closer look at the portfolio statistics:
Average Annual Return
VIP Speaker Series: 21.19%
Median Return: 11%
Standard Deviation: 35%
Enron: +935% (1998)
AMD: +348% (2009)
Dell: +249% (1998)
TXU: +173% (2004)
Wow - 21.2% annual return is great! The stock market (as you saw above) only averages about 8% a year and even private equity aims for 20% returns. For a fund to return 21.2% is huge.
Of course, it’s not guaranteed that investing in VIP will give you 20% annually, but I’m willing to bet the trend continues in the same direction. A more serious question is is this considered insider trading? Scheduling VIP events is privileged knowledge and I don’t announce the next speaker until 2 weeks prior to the event. It might seem trivial in this context, but its a serious question.
Suppose I did start trading based on this strategy and word quickly got out about this blog post (I know I’m flattering myself here, but bear with me), the efficient market theory hypothesis states that the market would eventually factor in this information in stock prices. Eventually, so many investors would invest based on VIP attendance, that companies who participate in VIP would be expected to perform at a certain level.
All in all though, I think we can all agree 21% is dope.