Group of University of North Dakota finance students beating the stock market

It was like a meeting of the junior executives’ club.

The fresh-faced UND students in their suits and ties brandished line charts, spreadsheets and PowerPoints as they explained what the slight interest rate hike means, or why the group should buy 25 shares of a utility company because of expected changes in nuclear energy regulations.

Last year, these students made a killing on the stock market, enjoying a return that was nearly 10 percentage points better than the S&P 500 index.

Altogether, the funds were up 35.9 percent.

Knut Lindaas, the group’s chief economist and a junior, said that after the stock market plummeted at the end of 2008, the group decided to be even more cautious and stick to big, stable companies that may have been undervalued by panicky investors.

The nattily dressed club is made up of two of Professor Steve Dennis’ finance classes. Besides writing papers and analyzing stocks, the more than 30 students manage roughly $300,000 in the Seifert-Foley Fund and $500,000 in the Stenehjem Fund, both named after donors.

“It’s structured like a class, but it’s not; it’s real money,” said Chris Femling, the group co-president and a senior.

He remembers well the terrifying Friday in the fall of 2008 when panic in the banking industry caused a near run on Wachovia, a North Carolina-based bank. The Wachovia bonds that the student funds owned lost half their value.

All the fund officers were up at 6 a.m. watching the news with trepidation, Femling said. “We don’t want to lose $10,000 of $20,000 of the school’s money.”

In a panic, they called the professor for advice.

“You can hear the fear in their voices,” Dennis said. He admitted that he was scared, too, but hearing other scared people made him realize that they were about to act on emotions and not reason. Wait and see if there’s an actual run on the bank, he said, and if, by Monday, that doesn’t happen, it’ll be OK.

It was OK.

Wachovia was eventually bought by Wells Fargo, which has a solid credit rating, meaning it’s very likely to repay bondholders.

But the near-miss taught the students a lesson. Investors were fearful, and there’s no telling what they’ll do. The best thing to do was seek refuge in quality stocks.

What they did was they looked at individual sectors, from building materials to consumer goods, and decided how much money they were going to invest, Lindaas said. Then they looked within each sector for companies with strong balance sheets and lots of cash reserves.

Their portfolio, for example, includes the likes of Microsoft Corp., General Dynamics and Walt Disney Co.

They’re not so sharp at picking the best sectors, Lindaas and Femling said, because there’s just so many factors involved in how they do, including market psychology, which isn’t easy to predict. Picking individual stocks based upon key performance measures was much simpler by comparison.

It doesn’t always work out to their advantage.

Femling remembered how the group decided to get rid of BNSF stocks because they didn’t look too hot. A few days later, Warren Buffet decided to get in, and the stock prices went back up, he said.

But overall, the strategy worked. Of the two funds, the Seifert-Foley Fund was the better measure of the class’s collective stock-picking ability. That’s the fund that’s almost pure stocks. It was up 42.3 percent, 16 percentage points better than the S&P 500. The other fund, the Stenehjem Fund, has some bonds, which tend to be safer in volatile times.

Femling, who’s taken Dennis’ class five times to stay involved in the fund, said he likes that it teaches him things he can’t learn in books or from lectures. “Here, you can see an actual outcome days after you make a decision.”

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