Students' studies pay off
By Matt Poston
Staff
Writer
The average college student couldn't imagine making
$70,000 a year while still being in school, though a group of students
at Purdue managed to make that much in January alone.
Timothy Dona, a graduate student in the Krannert
School of Management and the chairman of a student-managed investment
fund, said the more than 50 percent return on (the club's) investment
portfolio was a result of something called the January Effect.
"Our faculty advisor, Mike Cooper, showed
us some research from finance journals about something called the January
Effect," said Dona. "In December, investors typically sell stocks that
have gone down since their initial purchase in order to claim a valuable
tax deduction. In January, these stocks that have been depressed by
tax loss selling often experience a bounce," he said.
Dona also said a research team of students created
computer programs to research the past 30 years of stock history, specifically
the months of December and January.
"Their goal was to see if they could find
characteristics of stocks that predicted the January bounce," said
Dona.
The research team, said Dona, succeeded in isolating
different criteria that generally were characteristic of stocks that
had a January bounce.
The average return in January over the last 20
years for stocks with these criteria, which included company size and
recent performance, was approximately 22 percent, Dona said.
After their extensive analysis, the group picked
25 stocks, which were mostly small technology companies, which they
believed would perform well in January, said Dona.
Perform well is exactly what the stocks did.
"Of the 25, we experienced gains on 24, for
a total gain of approximately $70,000. Our return has been over 50 percent
since Dec. 28," said Dona.
Though this performance is astounding, it isn’t
typical of the group, said Dona.
"Prior to April of last year, our fund invested
in conservative large cap companies. Our holdings were companies like
Cisco and General Electric. We had under performed the market every
year of our three-year existence," said Dona.
Mike Cooper, an assistant professor of finance
and the current faculty advisor to the student-managed investment fund,
said that Professor Keith Smith of the Krannert School of Management
started the group in 1998.
"He started the whole thing and really deserves
a lot of credit," said Cooper.
Cooper also said that the group was started largely
in part from $100,000 donation by Richard Hansen, a Krannert alumnus,
who intended for his money to go to a program like the fund.
The next step for the organization is to figure
out what to do with the return.
"Out of our $70,000 profit, 75 percent will
be reinvested into the fund and up to 25 percent can be used to buy
something for the school," said Dona.
Future investment strategies will most likely be
more of a quantitative and analytical approach to the January Effect
idea.
"Our next strategy will probably use macro
economic variables such as interest rates and inflation rates to predict
the performance of an index like the S&P 500," Dona said. "If
the data look favorable, we invest, if they do not, we stay in cash."
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