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December 07, 2017 at 08:01 AM
Earlier this year, I was offered an opportunity to be a financial literacy mentor for a sixth-grade class at a Denver-area elementary school. Part of the program was a “stock market experience” allowing participants to build a mock portfolio and, at the conclusion of the program, see how well they performed compared with other Colorado-based teams.
The rules were straightforward: Each team was allotted $100,000, allowed to make a total of 300 trades and almost any security was eligible for inclusion. I was extremely pleased that our team came in fifth place, and came very close to winning (although at this time, the results are still unofficial). In retrospect, the four lessons imparted to these young investors may be helpful reminders, even for today’s most seasoned professionals.
Lesson One: Simplicity often trumps complexity. After an initial consultation with the teacher, we mutually decided to set some of our own rules, including no trading after the initial purchase, no margin and no derivatives. While it is doubtful that sixth-graders would have understood these concepts anyway, our approach was to allow the class to research and buy eight to 10 stocks. Since the time horizon was two months, we also decided not to change the mock portfolio during the experience, and let the chips fall wherever they may.
Lesson Two: Patience and conviction. Halfway through, one of the positions had an extremely disappointing earnings report, and the stock fell 14%. Despite the ground rules we established, I received an email from the teacher as the class wanted to know if they should sell. This reaction is perfectly reasonable and, while I did not say no, I did tell them that they would need to be right twice: once for the sale and then again to buy something else. On their own, they decided to stay the course and hold. While the position still ended in the red, by the time the experience ended, the loss was just 8%.
