Investing Apprentices
By John Gittelsohn, The Orange County Register, Calif.
Feb. 13–The Orange County Register Chuck Martin gives $1.5 million a year to graduate business students at UCI so they can play the stock market “with live ammunition.”
Students form teams, invest in a stock portfolio and vie for the highest returns. They keep half of the earnings — as much as $12,000 apiece — in a contest with all the drama of the Donald Trump television series, “The Apprentice.”
“They get 50 percent of the gains. I take 100 percent of the risk,” said Martin, 69, chairman of Mont Pelerin Capital, a Newport Beach hedge fund company. “With this, there are real consequences and you don’t know the outcome.”
Last year’s 52-week competition went down to the final day. The two top teams boosted their original investments 47 percent while the Dow Jones industrial average gained 2 percent.
Most graduate business schools offer investing courses. Others, including USC, give credit for classes that allow students to manage part of the school’s endowment.
But Andy Policano, dean of UCI’s Paul Merage School of Business, said he knows of no other program that lets students keep a share of their investment earnings.
“If there aren’t real consequences, then it’s not a real learning experience,” Policano said. “These are the kinds of things every student ought to know well: what makes a good company.”
Like Trump, Martin has made a career dealing with great sums and living in high style. Each spring, he invites the new teams to his home — a clifftop, oceanfront mansion in the gated enclave of Emerald Bay, north of Laguna Beach — to defend their investments.
“We’re sitting in his dining room and we’re able to hear the sound of the waves breaking on the bluffs,” said Allen Joo, captain of the Seventh Research Team, the current leader in this year’s competition. “He has done very well.”
Martin, an avid yachtsman, named the contest the Polaris Investment Competition after the North Star that historically guided navigators. The rules use his investment strategy — outlined in a self-published pamphlet entitled “The Little Black Book” — to target stocks with enough value and growth potential to soar more than 25 percent a year.
“My purpose is to help them learn about what makes a company great,” Martin said last week, sitting in his 12th-floor Newport Center office with a view stretching from the Big Canyon Country Club golf course to the wildfire burning in the Cleveland National Forest. “These skills are important not just for investment purposes but for career choices.”
In the first two years, about 100 eligible second-year MBA students applied. Only about 30 get to compete. Each team of four to six people invests $50,000 per member. They write up proposals to purchase stock in six companies that:
Make a product or service in a fast-growing industry.
Are well managed to take advantage of growth.
Have quality financials, such as low debt and a low price-earnings ratio.
Martin wants the students to buy and hold, but he requires teams to review the portfolios at least once a month.
“The ones that want to trade a lot never work out,” he said. “The ones who make good decisions early pay off.”
After looking at almost 1,000 companies, last year’s I Capital Partners team bought a portfolio that included Schnitzer Steel Industries, which sells scrap metal to Asia; Biosite, a maker of medical diagnostic kits; Satyam Computer Services, a consulting and information services company in India; J2 Global Communications, an electronic messaging service; and OmniVision Technologies Inc., which makes cell-phone cameras.
The stocks rode a bull market upward through the fall of 2004. In the spring, I Capital moved into cash to protect its gains. The move proved wise compared to then second-place Spy Glass Capital, which lost half of its gains in April. Meanwhile, the Wedge Capital team, once in negative territory, was climbing like a rocket.
Mitch Needelman, captain of I Capital, recalled sitting at his computer on Friday May 6, opening the message with the final results. His team’s investments had swollen by 46.51 percent, while rival Wedge Capital soared 46.98 percent — a difference of $235 on each member’s original $50,000.
“It was a blatant reminder that it didn’t matter how well you played,” said Needelman, who now works for an Irvine investment firm that manages $100 million. “It’s what the scoreboard is when it’s over.”
Members of Wedge Capital said a combination of bold decisions and good fortune led to their victory. In December, as their portfolio trailed the pack, team member Geoffrey Bremmer got a marketing job with Hansen Natural Corp., a Corona beverage maker.
Bremmer saw Hansen’s Monster energy drinks flying out the door, grabbing a growing market share in an exploding industry. Through the spring, the team sold sinking stocks and bought Hansen. By May, more than three-quarters of their portfolio was in the company.
“Our philosophy was invest in things we’re familiar with,” said Bremmer, 28, of Lake Forest, who still works for Hansen.
“The come from behind team had an exciting story, but it was at considerable risk,” Martin said. “I think the best team came in second.”
Martin dismissed concerns of insider trading, saying that Bremmer was not privy to any secret company information. But he changed this year’s competition to prohibit teams from putting more than 30 percent of their portfolio in a single company.
Still, his hedge fund bought Hansen stock based on the research that the students provided. One benefit of the competition, he said, is that the students bring quality companies to his attention. Another advantage is that he can find talent.
Justin Vaicek, captain of the third-place team, now works for Martin — a counterpart to Trump’s apprentice. Vaicek, 35, said he landed the job because of his passion for engaging in the type of competition Martin brought to UCI.
“I visit a store to buy shoes and I look at it as an investment,” he said. “Is the customer service good? Is the merchandise good? Is this a company I want to buy into or work for? What I do is take my passions and merge them into my career.”
TIPS FROM A MASTER: Chuck Martin’s self-published manifesto, “The Little Black Book: a guide to successful investing in the stock market,” lists 24 rules he uses to guide his trading. Some examples:
Rule 1: Diversification is the cardinal rule of good investing.
Rule 4: Do not bet on acquisitive companies. “Acquisition is what management does when it runs out of good ideas for its own business,” he writes, quoting management guru Peter Drucker.
Rule 5: Don’t delay your exit for tax reasons. “Under all normal circumstances, if you have decided that a stock is unattractive to own, you should proceed with the sale immediately.”
Rule 7: Do not set automatic buy/sell trigger prices. “Do not put your investment decision-making on autopilot — actively monitor each holding and decide on a continuous real-time basis whether to buy, hold or sell.”
Rule 12: Never fall in love with a stock. “I find it helpful, from time to time, to re-examine my favorite stocks by asking the question: ‘If I did not own this stock, would I buy it today?’”
Rule 14: Bargains may be overpriced. “If you are buying into the stock of a company that is a ‘dog’ there may be no price low enough to make it a good deal.”
Rule 17: Avoid the stocks of companies with inside boards. “In the worst-case examples, they become the puppets of management. Instead of representing the interests of shareholders, they become the advocates of management’s interests.”
Rule 19: Never hesitate to take a loss. “Ask yourself, ‘Is it more likely that this stock that is underwater will recover… or is it more probable that I can recover my loss by betting on a different horse?’”
Rule 22: Do not buy on stock tips. “There is no substitute for thoughtful, independent analysis. Short cuts end in trouble.”
Rule 23: Do not buy a stock based on a “heroic” CEO. “Many of the high profile CEOs of the late ’90s have ‘fallen on their swords’ and had their armor tarnished.”
CHUCK MARTIN:
Background: Born Jan. 7, 1937, the son of a maintenance man and a laundry clerk. He worked his way through Ohio State University, graduating in 1960 with five majors: physics, mathematics, chemistry, electrical engineering and business.
Professional: Early in his career, Martin co-founded a computer-aided design company and worked as an executive for technology companies before moving into finance. In 1984, he founded Enterprise Partners, once the largest venture capital firm in Southern California. A year later, he and real estate magnate George Argyros co-founded Westar Capital, a leveraged buyout firm.
Extra-curricular: Martin has served on the boards of the UCI Foundation and Chapman University and was chairman of the Orange County Museum of Art. He and his wife, Twyla, collect paintings by post-World War II California artists. He is an avid yachtsman and has a 14 handicap at golf.
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