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Last Friday I spent the morning judging the Portfolio Challenge for the University of Cincinnati Economics Center.  Each year the Economics Center holds the Stock Market Game for children in grades 4-12.  Teams of two to five students are given “$100,000” to invest over a ten week period.  The ten top performing teams of the 2500 teams that competed this year were eligible for the Portfolio Challenge.  For this leg of the competition, the students were judged on how they presented their investment strategy, portfolio results, and key learnings, not how much money they made.  Six judges selected two winning teams to fly to New York City this week and give their presentations at Goldman Sachs, Lazard and Legg Mason.

My initial reaction to the Stock Market Game is that it teaches kids more about gambling than investing.   I have read countless studies indicating that trying to pick individual stocks and time the market is a loser’s game.  After transaction costs are taken into account, the most prudent way to invest is to spread your investment risk as much as possible by creating a globally diversified portfolio with low cost mutual funds.  Why aren’t they teaching those concepts in school?  But I was curious to see what the students would have to say about their experience, so I agreed to be a judge – and learned an important lesson along the way.  Just because I didn’t agree with the mechanics of the game, doesn’t mean the students did not gain valuable knowledge about business, economics and world events.

Most of the teams did exactly what many individual investors do – they bought what they know.  Chipotle, Netflix, Kellogg’s Verizon, EA Sports are just a few of the companies whose shares were purchased.  One thing I did not consider is that any of the teams would buy bonds or mutual funds.  I was happy to hear two of the teams whose portfolios earned the most money did just that.  They were not comfortable with the concentrated holdings an individual stock portfolio offered.

I was surprised to see many of the teams hold their original portfolio from start to finish.  They quickly realized the uncertainty of trying to dump a perceived loser and then pick a guaranteed winner to take its place.    Every team mentioned the volatility of the market as one of the lessons learned.  While most came away inspired to invest their own money in the future, a few kids were whipsawed enough that they feel tentative about future participation in the stock market – and these were the winning teams!  It reminded me of many investors who sold in 2008 or early 2009, only to miss out of the phenomenal returns of the last four years.

In the end, all of the students seemed to have a much clearer understanding of investing concepts such as p/e ratios and betas while learning about team work, decision-making and budgeting in the process.   One thing that impressed me the most was the poise the students demonstrated when presenting their portfolios – whether they were fourth graders or seniors in high school.

I now realize just because I don’t agree with a teaching method, doesn’t mean it does not hold merit.  I did hear a rumor the game may soon be replaced with a challenge that takes place over a longer period of time and stresses more financial and investing basics, which would be even more beneficial.   As Chip pointed out in last week’s blog, we are all accountable for our own finances and future and these young investors will need all the financial education they can get!

I thought two fourth grade students from Indian Hill Elementary did a great job summing up the experience in a poem they wrote:

Buy it, sell it, make a trade,

The market has its decision made.

You can play with risk, or play it safe,

Either one could win you the race.

I hope the market is bull today,

Because a bear market is NOT okay!

You may end up in recession,

Then you will learn an important lesson.

Buy it low, sell it high,

Listen up: this is no lie!

The stock market can be dangerous and cruel,

This sly game can turn you into a fool.

When you get a loss, you also may gain;

These investments can be insane.

So we have learned in this crazy game,

The economy isn’t always tame!