This is not how you learn about investing.
This past week, some of the hottest portfolios in the country — funds with names like Canyonville, Westminster and Passaic Valley — shut down after racking up spectacular returns.
These aren’t hedge funds. They are play-money funds run by high-school students for a stock-picking contest.
Ryan McCabe and Vincent Botti, 18-year-old seniors at Passaic Valley High School in Little Falls, N.J., borrowed about $US45,000 on top of their $US100,000 and bought a handful of tiny biotechnology stocks, including Malvern, Pa.-based Recro Pharma REPH -1.43%, which has a total stock-market value of $US73 million, ran a net loss of $US17 million last year and states in its annual report, “We have never generated any revenue and may never be profitable.”
“We knew biotech would be either a big hit or a big miss,” Mr. McCabe says.
“You’ve got to go full steam ahead when you’re trying to get to the top” of the standings, Mr. Botti says. “If you don’t have enough guts to put it out there, you’re never going to succeed.”
Writing for WSJ last Thursday, Zweig noted the end of the annual Capitol Hill Challenge, which is part of the stock market game sponsored by Sifma Foundation, which he notes is the “nonprofit educational affiliate of the Securities Industry and Financial Markets Association.”
Also known as a major lobby for the brokerage industry.
This year, 4,000 teams of high schoolers were given 14 weeks and a hypothetical $US10,000 to make as much money as possible as part of the Challenge, which is how you end up with high school students giving the Wall Street Journal quotes like, “You’ve got to go full steam ahead when you’re trying to get to the top.”
In theory, these games are teaching a new generation of investors about the stock market.
But as Roger Shaffer of Canyonville Christian Academy, one of the finalist teams for this year’s challenge told Zweig, the way to win the game is by using “wild-eyed, gold-rush, Klondike speculation.”
This is also known as guessing, which is exactly NOT the kind of behaviour you want to reward.
And what’s more, these students are investing — and borrowing against — theoretical dollars, so there is no REAL risk. Certainly, many of the 4,000 teams in this years challenge lost a significant amount, if not all, of the theoretical money they were given. And so any lesson that you might hope to teach teams that lost money is, well, lost, because any losses incurred aren’t real.
As we’ve illustrated in the past, successful investing for non-professional investors (and let’s face it: no matter what a high school says they want to do with their lives, they are not professional investors), is about putting money away consistently and starting at a young age.
Here’s the growth of $US300/month invested in the S&P 500 at age 25 and 35, and $US600/month invested at age 45. The younger, the better.
And saving for retirement starting at 18 would make these returns even better.
But the problem is that these students, which Sifma told WSJ included more than 600,000 this year alone, teaches that wild speculation and luck are the things that reward investors.
Which does way more bad than good for the next generation of potential stock market investors.