Stock Market Simulation

I recently completed the Junior Achievement Investment Strategies Program with a group of grade 9 students in Calgary. I had been apprehensive that the course would not be valuable to them for two reasons: the stock market is far removed from their typical concerns and the time period is too short to make the result meaningful. However, the teacher and students all reported that they enjoyed it very much. I spent my final hour with them finding out what they learned.

I was surprised by the one problem they encountered. They came into class one Monday, ready to trade their stocks, only to find that it was working for the Canadian market (TSX), but not for the US markets (NYSE, NASDAQ). It turned out to be Memorial Day and the US exchanges were closed for the day. One student insisted that his stock pick went down while they were prevented from trading. As I pointed out the effect of rapid turnover (similar to day trading) and the costs of trading commissions, one student asked where the commissions go. Who earns them and what do they earn it for? Our simulation used a $25 flat commission, which is reasonable for a small account at a bank-owned discount brokerage. The commission includes no advice, just trade routing, execution and settlement (in my understanding).

The market overall was going down over the six weeks of the simulation. That was actually a relief to me, since none of the student teams broke even. They learned the market is risky and losing money is a real possibility. That is a lesson that is better to learn (how it feels) with fantasy money rather than real money.

I was surprised that most of the teams bought Facebook. I like to joke that IPO stands for “it’s probably overpriced”. They mostly concentrated on well known names such as Walmart, Apple and Google. One of the teams specifically learned that buying companies at random, just because they’ve heard of the company and it looks like it’s been going up doesn’t really work. They started to try and research the companies they wanted to include in their portfolio. Another team guessed that less “mainstream” companies would perform better. I agree that if a little-known company goes mainstream, the share price is likely to jump.

Some teams bought way too many stocks, others just one (BRK.A). We talked about diversification, which can save an investor from an unforeseen negative event, but also the danger of “over-diversification”. I explained that index funds provide great diversification, while minimizing trading commissions.

The experience was an eyeopener for the students about the big, scary stock market that they read and hear so much about. It was an eyeopener for me in what problems will be encountered by total novices. It’s also difficult to encapsulate years of experience and understanding into a few brief presentations. If you were to take an introductory class on investing, what questions would you ask? What would you want someone to show you how to do?

3 thoughts on “Stock Market Simulation”

  1. Great work Robert. I have been a Junior Achievement Company Advisor for close to 10 years now and really enjoy growing the entrepreneurial spirit in kids.

    It’s great to see them taking on the investing world as well. I suspect that if you were to look at the cross-section of students investment decisions it would be similar breakdown to those actual investors as well. Many retail investors are just investing in companies they know, while other diligently research lesser known companies.

    Once the basics of an introduction to investing course are covered I think more information should be developed on researching companies. Many people talk about “doing your own research” but few people are forthcoming about their specific research methodologies.

  2. I’d just throw up alpha, beta, sigma and sharpe ratios with the natural-language definition … even if people can’t calculate the values themselves, understanding this is a bit of a starting point. I’d also love examples of how buying something cheap increases the return–it’s simple, but people generally don’t get it.

    And if you can find an easy way to demonstrate inflation risk, that would be awesome since many people don’t understand that, either.

  3. Good point on inflation risk Greg. Showing people that just hoarding money under the mattress is actually losing money. Market risk is another concept that could be beneficial to communicate early.

    …and also explaining why selling to Cash4Gold is not a good investment strategy.

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