I have loved investing in the stock market since I was very young. I remember watching Nightly Business Report on PBS with my dad as a kid, and my favorite part was when the biggest winners and losers of the day rolled across the screen.
The summer before my freshman year of high school, I entered an online investment contest run by a popular money magazine. Actually, I entered under my father’s name, because the minimum age to compete was 18.
The rules were simple: everyone starts with a fictional investment account of $100,000, and you try to grow that account as fast as possible by buying and selling stocks. At the end of the 2 month contest, the person with the most money won a $3,000 laptop computer.
I had seen similar investment contests on Yahoo! Finance, and knew the general strategy to win these contests.
By executing that trading strategy, I got first place in the investment contest. At the age of 13, I had won myself a shiny new $3,000 laptop computer.
So how did I win the contest?
It wasn’t by investing in Vanguard index funds.
There certainly was a little luck involved. But you make your own luck by using the right strategies.
Here’s the secret: to win investment contests, you need to take as much risk as possible. Back then, it involved purchasing Initial Public Offerings (IPOs), which were very hot in the 1990s. These stocks would typically go up a lot in their first few days of trading. I would purchase an IPO on the first day of trading, and sell them a few days later. I would put 100% on my money into one IPO, make some “money,” and move on to the next IPO 1-3 days later.
You’ll never win an investment contest making average returns, and index fund investing will doom you to the middle of the pack.
My motto in investment contests was to take as much risk as possible, because the prize for second place and last place is the same: $0.
To win investment contests, take as much risk as possible, because the prize for second place and last place is the same: $0. Click To TweetI took a job as a trader at a major investment bank following college, and because I put my contest win on my CV, people would ask about how I won that laptop computer as a teenager. I told them my strategy, and they instantly understood how I won. That’s because in some ways, their Wall Street job involves doing exactly the same thing. By taking calculated risks, they have the potential of earning a huge bonus. Of course, if things go poorly, you’ll probably get fired, but if you are crafty, you’ll be able to get a job somewhere else doing the same thing.
Banks know this incentive for their traders to take risk, and they have risk management departments to keep their traders in line.
Investment Contests With Kids
Personal finance doesn’t get taught very well in our middle schools and high schools. If it gets talked about at all, it is done at a very superficial level.
Many high school personal finance curricula will encourage interest in investing in the stock market through investment contests. They would be structured similarly to the investment contest I won, where you would pick a few stocks and track your performance over the course of the school year. Unfortunately, 6-9 months is a very short period of time in the world of investing, and not only does it encourage a very short-term view on investing (ambitious students may feel that manipulating their portfolio will produce larger returns), it may also encourage excessive risk-taking.
If I had a limited amount of time to teach investing to middle school or high school students, I would focus on two key investment principles:
- The power of compound interest – save early and often
- The importance of diversification
Of course, there’s so many other important topics, but you’ll be lucky to get an hour into a high school curriculum, so it’s important to spend that one hour hammering those two points home. As they get older, hopefully those principles will stay with them, and they will gravitate towards index fund investing instead of picking individual stocks.
This is compared to the stock picking contest approach to teaching investing, which drills into kids the notions that you can beat the market through individual stocks (you can’t), you want to beat your peers (personal finance is a one-player game), and you want to make the highest return possible (it’s fine to accept the market return).
The investment contest approach drills into kids the notions that you can beat the market with individual stocks (you can’t), you want to beat your peers (it's actually a one-player game), and you want to make the highest return… Click To TweetConclusion
Many schools try to introduce investing to kids through “fun” investment contests. While these competitions may encourage interest in investing, they also encourage bad investing habits.
What do you think? Were you taught anything about investing in high school? Did you ever participate in a stock picking contest as part of a class?
I completely agree that a contest like that would teach horrific habits of investing. It would basically teach kids the adrenaline rush of gambling legally.
I like your idea of compounding interest and teaching kids about finances over the long run. That’s surely the best way to do it. Otherwise, they’ll come away with all of the wrong ideas.
My oldest kid is almost getting to the point where we can start talking about this stuff. Maybe another year or two.
I am really looking forward to the challenge though!
TPP
That might be the best blog you’ve written thus far!
I wish I had learned about stocks when I was younger. 2 of my cousins were into it, but to me, it seemed so foreign and so dangerous…playing with money! Yet here I was in my early 20s pulling out loans like it was Monopoly money and literally playing with it. Oh well. I am glad to see you made it work for you in the past. I am now enjoying my pick it and pretty much forget it approach to investing.
Absolutely love this post. Quite original (and can’t believe no one has come up with it before this).
I went to a magnet/gifted program in high school and we too had investment competitions. I won making a killing off a $10,000 “investment” and I did so by investing in penny stocks. Not exactly the kind of thing I would want to do with real money and especially with my retirement accounts.
It was fun but you are absolutely right, it enforced the wrong investing habit (frequent trading and high risk/high reward type behavior.
This is definitely going in one of my upcoming Grand Rounds (will let you know when I do post it). Thanks
Great post and I wholeheartedly agree with the lesson that it teaches bad investing habits.
The counter argument would be in the data and if you look at the winners of these competitions … how do they end up doing with finances in the future?
The winners usually figure out the pattern rather than learn anything about investing and I would argue they end up doing well In their careers because 90% of what we do is pattern recognition.
Investing with fake money for short term is completely different than investing with real hard earned cash. I agree, teaching kids with investment contests sends the wrong message. Great post
Wanted to let you know I featured this in my Grand rounds.
https://xrayvsn.com/2018/07/26/grand-rounds-7-26-18/
Thank you for the great post.
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