Assignment: Innovative Strategies for Investing

When Greg Tanner ’14 finished the courses in the Yale School of Management’s MBA integrated core curriculum last spring, he saw an opportunity for fusing insights from two: Investor, which looks at the financial markets and the tools of finance from an investor’s point of view, and Innovator, which examines methods for generating ideas and sustaining creativity in an organization.

From left, Greg Tanner '14, Aaron Winters '14, Marcel Logan '14, and Clinton Tepper '14
Tanner, an investment management veteran, worked with his classmates Marcel Logan ’14, Clinton Tepper ’14, and Aaron Winters ’14 to develop an independent study course focused on fostering new investment strategies and insights by drawing on the concepts they had studied. “The goal was to integrate lessons we’d learned from both courses,” Tanner says. “The purpose, more broadly, was really to talk about how to invest money in the markets.”

Working as a team, the students applied tools for collaboration and idea generation that they’d learned in Innovator. Lessons from the Problem Framing  course taught by Paul Bracken, professor of management and professor of political science, and Nathan Novemsky, professor of marketing, were also applicable, Winters says.

“We thought of ourselves as a hedge fund looking for an idea to present to potential investors,” Tanner says. “We knew the fundamental value that Innovator would have across disciplines. Creative approaches to teamwork and analysis were a big part of our process.”

Roger Ibbotson, professor in the practice emeritus of finance at Yale SOM, agreed to oversee an independent study course in the fall 2013 semester called “The I2 Factor: Combining Innovation and Investment.” For 15 weeks, the students generated and analyzed new approaches to investing.

“They come from diverse backgrounds, covering finance, strategy, operations, modeling, quantitative analysis, and computer science,” Ibbotson says. “They did a very thorough job every step of the way.”

The point was really to put yourself in a position to share ideas, to hear ideas, and to get your ideas challenged.

The students generated 100 diverse investment strategies, whittled that number down to 20 that seemed to have the most promise, and then vigorously debated their potential merits before narrowing them to four. The ideas varied widely over industry and sector, so the group’s professional diversity was critical. “I suspect it was the unique personality characteristics and expertise of each person that made the project so successful,” Tepper says.

Tanner says that the students employed a comprehensive, empirical analysis with an emphasis on risk, return, and testability. “We researched on our own, collected available market data, and then applied the analysis tools we learned in class,” he says.

One of the four final proposals called for a new method of pricing options. The students believed that the most popular option pricing models do not adequately take into account the many and complex factors that influence a stock’s price over time. “Most common option price models oversimplify reality,” Tanner says. “We suggested constructing a new option-pricing model that’s based on market observations.”

Other ideas included a recommendation that companies with high tax rates are ripe for takeovers; a prediction that energy shares face an uncertain future shaped by both growing demand and possible disruptions to infrastructure; and the creation of an instrument investing in socially responsible funds.

In December, the students presented their research and proposals to Yale SOM’s student Investment Club, and to a panel of investment managers at Zebra Capital Management, an investment firm founded and chaired by Ibbotson.

“Roger and his colleagues spent two hours in a meeting with us, and the feedback was rich and comprehensive,” Tanner says. “With the additional career perspective that they bring, they commented on how well the ideas might work in a business and how an institutional client might view them.”

Each source of feedback proved helpful, Tepper adds. “Our internal discussions, peer critiques from classmates, and mentorship from Professor Ibbotson, all tempered our ideas,” he says. “The feedback at the end was a welcome bonus.”

Logan agreed that the entire process was really about feedback and teamwork, processes honed during the integrated core curriculum, which has a focus on group work. “The point was really to put yourself in a position to share ideas, to hear ideas, and to get your ideas challenged,” he says. “Many times in Yale SOM’s group work, the benefit is learning from folks around you.”