Advice Please re: My Son's AP Economics Investing Project in School

[MomTo2Boys]

Hey Everyone,

My older son is in AP Economics this year and his school (yes, it's a private school) is literally "giving" each student $1,000 with which to trade over the course of this school year. If, at the end of the school year, THE CLASS (as in: his one classroom class, which probably has maybe 8 students, not all the kids in his grade) has made a profit, then the students get to divide the profit equally amongst themselves. As in: the school cuts them all checks for their divided share of the profit.

(Initially the plan was that any STUDENT who had a profit above and beyond the $1,000 got to have a check cut to him or her for the profit they generated, but then the teacher changed it in order to encourage cooperation between the students.)

So I'm coming on here and trying to pick y'all's brains. Obviously, this is a huge teaching moment for me as a mother and for my son as a learner, and I already have started him on reading Harry Browne's book, which I of course own. But I can't help but wonder if I should encourage him to go full PP with the money (since they have from now until, what, May?) or to add in some EDV and/or REIT or other Variable Portfolio sorts of things for some spice and some other forms of teachable moments.  The teacher seems to be a 100% stock kind of girl; she's sweet but not too on the ball and can't even answer my questions (re: which brokerage? Are you charging the students trading fees?), so, you know, this should be interesting to say the least. A teachable moment... that will last all school year.

Theoretically on Fridays, which have been set aside as the kids' portfolio tinkering day, the students will be allowed to hand the teacher written buy/sell orders, who will then transmit the orders to whomever it is wherever they are located to be executed, and the portfolios will then have their holdings bought/sold as per each student's wishes and directions.

My son, a very good, solid, level-headed kid, looks to me for investing advice with this. I want to teach him the PP on one hand, of course, and on the other hand - WOW, you guys, he gets to experiment risk-free and make mistakes (or not!) with someone else's money! For free!

What would you guys do with this opportunity if you were the parent and he was your child?

[craigr]

Problem sounds like he's hitched to the rest of the classmates. So if you get a couple that have big losses it's unlikely he'd make enough profit to pull them out of the hole.

So then there are few choices:

1) Conservative Permanent Portfolio and convince the entire class to do it because chances are they won't lose much money and probably get a profit of sorts.

2) Convince everyone to dump it into a broadly based stock index fund and roll the dice to get some good gains at the risk of losing money and getting nothing.

3) Know that everyone else is going to ignore the above and do a bunch of crazy dumb stuff and ruin his chances. So swing for the fences on some extremely risky option/margin/penny stock strategy and hope he hits it big enough to pull up the losers and make some money that way (e.g 500%+ returns minimum). Then again, he could be the loser as well dragging everyone down.

This is kind of a strange lesson. It encourages bad investing risks and the people that take the worst risks and lose drag everyone else down with them. I'm not sure what the point of this exercise is exactly...

[MomTo2Boys]

This is kind of a strange lesson. It encourages bad investing risks and the people that take the worst risks and lose drag everyone else down with them. I'm not sure what the point of this exercise is exactly...

I read this and thought to myself, "What if the point is for the kids to have practice looking at different stocks or funds so the school can be all LOOK AT THE NIFTY STUFF WE LET OUR STUDENTS DO!, but then make sure at the end of the school year that the school doesn't actually have to write a check to anyone for a profit?" LOL!

It's the first year the school has done anything at all even remotely like this, and the teacher doesn't seem too terribly money savvy. I'm thinking it's a very well-intentioned activity with no specific endgame but just exposing the kids to some real-life activities that they haven't ever really gotten to do yet. But, of course, you made some excellent points, and I'm sure you're right about the whole thing...

[craigr]

I suspect you're right it's just to teach them how markets, etc. work. Just that maybe the better lesson would be the teacher to tell them that they get to pool their money. They invest any way they want in stocks but must use active trading techniques. The teacher then challenges them to beat the broad market index doing that over the same period. If they do, they get the profit over the passive index returns.

That would likely teach them a lesson that beating the index is really hard. They may do it, but after expenses, etc. are deducted it would be tough!

[stone]

It sounds to me that they have in effect been given a way to keep any upside and not be at all responsible for any downside. So they are in a totally different position to someone looking after their own personal savings. Wouldn't the "wisest" thing for the kids to do be to all take a coordinated one way bet with the most volatile security they are allowed to buy. If they all put all of their money into  one security that say had a 50% chance of a 99% loss and a 50% chance of a 100x gain, then there is a 50% chance that they will all do nicely .

If they all do different stuff and much of that is sensible, then the school might get to keep some of its money but there is little chance of the kids getting much.

[Storm]

I would encourage the kids to use a passive investing strategy, whether it's the PP or simply a Bogleheads 60/40 stocks/bonds portfolio.  If trades are free, I would encourage them to rebalance quarterly, as this will at least give them something to do so they feel like they are taking some action.  The problem is that passive investing is boring... Telling the kids to buy 4 ETFs and then don't touch it until the end of the year is pretty unlikely to make anyone excited about investing.

But, this does have some teachable moments.  If your son chooses to do a passive investing strategy, he will probably be pleased at the end of the year when his results are better than most of the class.  And you can check his portfolio weekly or monthly and he will learn how different assets respond to different world events, which is, in my opinion, one of the best things the PP can teach you.

Good luck!

[stone]

Storm, they aren't being given $1000 to care for for a year. They in effect are being given a call option for any security(s) they choose. They expressly are told that they keep any gains but do not get the original $1000 nor have to pay for any losses. As such they need to be really really bad investors. They need to choose whatever portfolio is expected to have maximal volatility over the course of one year. My guess is that the best approach would be for every one in the class to buy the same penny stock and then cross their fingers and leave it alone for the entire year.

I guess as a class room exercise the main thing it teaches is that offering someone a share of any profits from investing your money induces them to be wantonly reckless. If they act responsibly with your money it is only because they are doing so out of decency despite your inducement to them to be reckless.

[MediumTex]

I am reading this exercise as basically one in which the students are challenged to create a market narrative and act on it successfully through speculative investment decisions.

In other words, the exercise is about speculating in a way that will make for an interesting story.

This is what many people think investing is about.

I would just go with the intent of the exercise, which seems to be to swing for the fence and if you get a home run act like it was a result of skill and not luck.

Here is a good "investment story" that he might look into.  Mcmoran Exploration is a Gulf of Mexico natural gas E&P company.  They have pioneered the "shallow water ultra-deep" natural gas play.  The company is getting close to either a major validation of the concept or a major disappointment.  All of this will be playing out over the next six months or so.  This investment opportunity can be exploited through a combination of Mcmoran stock (ticker MMR), one of its partners EXXI and an ultra deep royalty trust with the symbol of TISDZ.

The story above would make for an interesting presentation later in the year.  It would certainly be a lot more interesting than getting up in front of the class in May and saying: "I spent about five minutes on this project in September and set up a Permanent Portfolio and really didn't think about it again until this morning.  I guess it was a good experience.  I was really too busy with other things to give it much thought.  It looks like I had pretty good returns.  Not great, but not bad either.  Pretty steady."

[blackomen]

I'd probably do a "speculative PP" (quite the oxymoron):

Make the PP as one would normally do but..

Put high beta, high risk growth and penny stocks in the "Equity" portion instead of an index.  Load up on stuff like Facebook, Apple, Chinese stocks, etc.

[MediumTex]

He could do one of those 2x leveraged PPs.

That might be fun to watch and report on.

[Pointedstick]

This poorly thought out exercise seems like it's ironically more of a lesson in proper institutional design. Let the students keep the money they individually make, and you encourage them to be prudent and conservative with their investments. Pool their money with everyone, and you encourage them to take foolish risks to try to pull up the average. I wonder if any of the students will end up grasping this.

[stone]

I really do think that they need to get together and all choose the same dumb speculative play. Medium Tex's idea about the gas company sounds the right kind of idea. I'm sure that it is a mathematically fact that they collectively need the most volatile portfolio they can conjure up. A flat year is as bad for them as a total loss. Any diversification will be squandering valuable volatility. Remember they have been set a very peculiar task. What applies to them is NOT what a PP is for.

[Ad Orientem]

I think this class project is ill conceived. Unless I am missing something it sounds like it is intended to encourage speculative short term investing. My advice would be first to try and get all or a majority of the kids to collaborate and pool their money into an HBPP or even a boglehead type portfolio. If that's not allowed or you can't get enough support, then I would go with plan B. That being Craig's "swing for the fences."

But hey, there are worse things in life than being handed a thousand dollars of someone else's cash and told to speculate with it, with no personal risk. He can pretend he is a Wall Street fund manager lol. Just be sure that your son knows this is actually a bad way to invest. Beyond that start looking for a super speculative investment and have fun. I would suggest tuning into Jim Cramer's Mad Money for some ideas on speculative investments. You can also peruse Seeking Alpha. Highly leveraged ETF's are another good choice.

I don't have a VP right now but if someone handed me a thousand bucks and said speculate with it I would be looking for something that had the potential to deliver huge intermediate term profits (or crash and burn). Maybe 3x silver?

[Gumby]

I remember in elementary school (in the mid 1980s) everyone in our region competed in a stock market contest sponsored by the local newspaper. Each public school classroom in the region — in every age group — broke up into teams of four students and we all got an imaginary $1,000 to buy or short any stock we wanted to. They had official contest forms and everything that were mailed into a central location to make these imaginary transactions. At the end of the 6 month contest, the winning 4-person team in each age group would get to tour the NYSE trading floor, tour Federal Hall on Wall Street, have a private tour of the Federal Reserve Gold Vault and have lunch in the Federal Reserve Board Room before giving speeches at the Fed lectern explaining their winning strategies.

Most students chose a few bluechip companies. I ended up convincing everyone on my team that the chances of us winning this regional contest were incredibly small and we should just shoot for the moon instead of investing wisely. I convinced our team to invest 100% of our money in a single semiconductor penny stock (semiconductor companies were revolutionizing computers at the time).

Within a few weeks, our stock rose by about 300%. So, we sold about 30% of the stock and put the money towards shorting another stock. By the end of the contest, we ended up having a return of about 500% — winning not only our age group, but almost every age group through high school in the region.

We thought we were geniuses, and we had the most amazing time touring the NYSE and the Fed. We even got a fake newspaper cover with our picture on it.

But, the truth is that it was a terrible experience for me because it gave me a false belief that I had talent for investing. Of course, I had no such talent. I was just lucky and had nothing to lose. The only lesson I learned is that you have to take a lot of risk to win a short term investing contest.

[stone]

I'm ashamed to say that this class project has been bugging me all evening . I think it is slightly different from Gumby's school project because the children do not need to win a contest, they just need a fighting chance of making a profit but are "free" to walk away from a 100% loss. They do not need to make a massive return- any profit is theirs. To my mind what they need is a strategy that gives a high chance of a respectable profit and a moderate chance of a total 100% loss. I'm unfamiliar with option trading but my dim understanding is that selling put options would give them just that kind of exposure. If all the children got together and sold put options for say SPY then could they rake in a decent premium if SPY doesn't fall below say 80% of its current price but loose all of the money they are encharged with if it does? Basically the children would be providing insurance that SPY doesn't fall much in price over the coming year.

[MediumTex]

I'm ashamed to say that this class project has been bugging me all evening . I think it is slightly different from Gumby's school project because the children do not need to win a contest, they just need a fighting chance of making a profit but are "free" to walk away from a 100% loss.

They're sort of like large U.S. banks.

[stone]

I'm ashamed to say that this class project has been bugging me all evening . I think it is slightly different from Gumby's school project because the children do not need to win a contest, they just need a fighting chance of making a profit but are "free" to walk away from a 100% loss.

They're sort of like large U.S. banks.

Precisely and so the children need to act like investment bankers not like HBPP holders.

[smurff]

I'm ashamed to say that this class project has been bugging me all evening . I think it is slightly different from Gumby's school project because the children do not need to win a contest, they just need a fighting chance of making a profit but are "free" to walk away from a 100% loss.

They're sort of like large U.S. banks.

If they keep it up, they might have to do TARP by the end of the school year.  They can borrow low from the Fed (the school's equivalent)  and make a few bucks on the carry trade.  Then the teacher can tell them about quantitative easing.

Really, when I first read it, I thought, Isn't this project teaching the students how to privatize all your profits and socialize all your losses?  Talk about moral hazard!

[Pointedstick]

Really, when I first read it, I thought, Isn't this project teaching the students how to privatize all your profits and socialize all your losses?  Talk about moral hazard!

Actually, both are socialized!

[smurff]

That's right!  They're even giving them the start-up capital!

[MediumTex]

Really, when I first read it, I thought, Isn't this project teaching the students how to privatize all your profits and socialize all your losses?  Talk about moral hazard!

Actually, both are socialized!

This class project may turn into a financial version of The Wave.

[craigr]

I'm thinking at this point we should get them to start a ponzi scheme to rip off their fellow classmates and flee the school with the assets.

[stone]

I do think this IS a valuable school lesson though. It shows in crystal clarity that markets only steer people in a sane direction IF they are in a framework where losses are fully born by those who stand to make any gains.

[dragoncar]

I'm glad high school economics classes are teaching about negative externalities.