What Teenagers Really Learn From Stock-Market Games
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What Teenagers Really Learn From Stock-Market Games

Successful investors diversify broadly, avoid unnecessary risk and rarely trade. So why are kids getting rewarded for doing the opposite?

By JASON ZWEIG
Mon, Mar 28, 2022 10:43amGrey Clock 3 min

Every year, more than a million high-school students across the U.S. learn about investing through stock-picking games. If you have teenagers, they may be playing this spring.

Proponents say these games are exciting and inspire an interest in investing.

We could make drivers’ education exciting, too, by teaching kids to run red lights and crash into brick walls. I suppose you could even argue that might make the survivors better drivers.

Of course, that isn’t how we teach teenagers to drive. Yet when it comes to investing and “financial literacy,” millions of teenagers learn what it’s like to take wild risks, using play money—often amplified with more fantasy money that they borrow—to fire off a barrage of fast trades in turbulent assets.

In the long run, investors who diversify broadly, avoid unnecessary risk and rarely trade are almost certain to do well. In these stock-market competitions, teenagers who behave like that are almost certain to lose.

Emma Freeman, a senior at Lewisburg Area High School in Lewisburg, Pa., won that state’s championship when she was in a ninth-grade economics class taught by Michael Creeger. She turned $100,000 in play money into more than $550,000 in 10 weeks. “I played it as if I was day trading,” she says.

Emma would look up which stocks had just risen the most, then sell them short so she could profit from a decline. “Anything that had jumped up like crazy, when it looked like just hype, we short-sold the crap out of it,” she says.

Emma traded up to 40 times a day. “My friends told me I looked like a madwoman,” she recalls. “I would be staring at the screen and making crazy faces and stuff because it was so intense.”

Last spring, another of Mr. Creeger’s ninth-grade economics students, Zachery Engle, won the state championship. He traded 117 times in 10 weeks.

Zach used about $200,000 in margin borrowing to drive his pretend portfolio up to $583,070. “It’s nice that they let you do that,” he says. “It makes it easier to make money.”

Or lose money—which is why Warren Buffett repeatedly warns investors not to use leverage.

Mark Brookshire, founder and chief executive of Stock-Trak Inc. of Montreal, which provides the stock simulation that Emma and Zach played, says more than 500,000 students participate in grades K-12. Most play only as part of a class, not in a wider competition.

Teachers can limit the number of trades, restrict margin or prohibit short selling. Outside of state-run contests, says Mr. Brookshire, only 14% of teachers permit margin—so most portfolios aren’t leveraged. Over the typical 10-week course, the average student makes 22 trades.

“Anybody who can turn $100,000 into $200,000 in 10 weeks with what they learned in their high-school class is just lucky,” says Mr. Brookshire. “The next 10 weeks they probably won’t be so lucky. That will be the lesson, that the more you do it, the more likely you’re going to lose. I want them to lose my virtual money before they lose their own real money.”

Ryan Monoski, a former business teacher at Montgomery High School in Montgomery, Pa., has come to doubt that lesson.

In 2016 and 2017, his teams won the national championship in the Capitol Hill Challenge, a stock-picking competition run by the Sifma Foundation, a nonprofit supported by the brokerage industry. His teams also won Pennsylvania’s state championship at least a dozen times.

All these contests “motivate students to take extreme risks that will bring extreme rewards and extreme losses, and that’s not the right way to invest,” says Mr. Monoski, who now runs a stock-picking channel on YouTube.

Like teams from other schools, Mr. Monoski’s students often borrowed money to sell short. They used 50% margin to buy explosively volatile triple-leveraged exchange-traded funds, magnifying daily market moves 4.5-fold.

The Capitol Hill Challenge no longer allows any of that.

However, sessions of the Sifma Foundation’s Stock Market Game, run in all 50 states and played by 600,000 children annually, may permit selling short and borrowing on margin. Teams often own as few as five stocks at a time, not nearly enough diversification by prudent investing standards.

“It’s important to recognize that the simulation plays a small part,” says Melanie Mortimer, president of the Sifma Foundation. “The real focus is the curriculum, which is all about the fundamentals of investing and the capital markets.”

Richard Daly, the foundation’s chairman, says the organization shares concerns that the game might teach children to take too much risk. But, he says, “we don’t want to lose the greater good of all the kids we’re touching that otherwise wouldn’t be exposed” to the stock market at all.

My drivers’ ed teacher taught me to put safety first, and yours probably did, too. That’s what children learning how to invest should be rewarded for. They shouldn’t be proclaimed “winners” for taking huge risks that could encourage a lifetime of bad behaviour.

Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: March 25, 2022.

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By GREG IP
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This year’s crypto collapse has all the hallmarks of a classic banking crisis: runs, fire sales, contagion.

What it doesn’t have are banks.

Check out the bankruptcy filings of crypto platforms Voyager Digital Holdings Inc., Celsius Network LLC and FTX Trading Ltd. and hedge fund Three Arrows Capital, and you won’t find any banks listed among their largest creditors.

While bankruptcy filings aren’t entirely clear, they describe many of the largest creditors as customers or other crypto-related companies. Crypto companies, in other words, operate in a closed loop, deeply interconnected within that loop but with few apparent connections of significance to traditional finance. This explains how an asset class once worth roughly $3 trillion could lose 72% of its value, and prominent intermediaries could go bust, with no discernible spillovers to the financial system.

“Crypto space…is largely circular,” Yale University economist Gary Gorton and University of Michigan law professor Jeffery Zhang write in a forthcoming paper. “Once crypto banks obtain deposits from investors, these firms borrow, lend, and trade with themselves. They do not interact with firms connected to the real economy.”

A few years from now, things might have been different, given the intensifying pressure on regulators and bankers to embrace crypto. The crypto meltdown may have prevented that—and a much wider crisis.

Crypto has long been marketed as an unregulated, anonymous, frictionless, more accessible alternative to traditional banks and currencies. Yet its mushrooming ecosystem looks a lot like the banking system, accepting deposits and making loans. Messrs. Gorton and Zhang write, “Crypto lending platforms recreated banking all over again… if an entity engages in borrowing and lending, it is economically equivalent to a bank even if it’s not labeled as one.”

And just like the banking system, crypto is leveraged and interconnected, and thus vulnerable to debilitating runs and contagion. This year’s crisis began in May when TerraUSD, a purported stablecoin—i.e., a cryptocurrency that aimed to sustain a constant value against the dollar—collapsed as investors lost faith in its backing asset, a token called Luna. Rumours that Celsius had lost money on Terra and Luna led to a run on its deposits and in July Celsius filed for bankruptcy protection.

Three Arrows, a crypto hedge fund that had invested in Luna, had to liquidate. Losses on a loan to Three Arrows and contagion from Celsius forced Voyager into bankruptcy protection.

Meanwhile FTX’s trading affiliate Alameda Research and Voyager had lent to each other, and Alameda and Celsius also had exposure to each other. But it was the linkages between FTX and Alameda that were the two companies’ undoing. Like many platforms, FTX issued its own cryptocurrency, FTT. After this was revealed to be Alameda’s main asset, Binance, another major platform, said it would dump its own FTT holdings, setting off the run that triggered FTX’s collapse.

Genesis Global Capital, another crypto lender, had exposure to both Three Arrows and Alameda. It has suspended withdrawals and sought outside cash in the wake of FTX’s demise. BlockFi, another crypto lender with exposure to FTX and Alameda, is preparing a bankruptcy filing, the Journal has reported.

The density of connections between these players is nicely illustrated with a sprawling diagram in an October report by the Financial Stability Oversight Council, which brings together federal financial regulators.

To historians, this litany of contagion and collapse is reminiscent of the free banking era from 1837 to 1863 when banks issued their own bank notes, fraud proliferated, and runs, suspensions of withdrawals, and panics occurred regularly. Yet while those crises routinely walloped business activity, crypto’s has largely passed the economy by.

Some investors, from unsophisticated individuals to big venture-capital and pension funds, have sustained losses, some life-changing. But these are qualitatively different from the sorts of losses that threaten the solvency of major lending institutions and the broader financial system’s stability.

To be sure, some loan or investment losses by banks can’t be ruled out. Banks also supply crypto companies with custodial and payment services and hold their cash, such as to back stablecoins. Some small banks that cater to crypto companies have been buffeted by large outflows of deposits.

Traditional finance had little incentive to build connections to crypto because, unlike government bonds or mortgages or commercial loans or even derivatives, crypto played no role in the real economy. It’s largely been shunned as a means of payment except where untraceability is paramount, such as money laundering and ransomware. Much-hyped crypto innovations such as stablecoins and DeFi, a sort of automated exchange, mostly facilitate speculation in crypto rather than useful economic activity.

Crypto’s grubby reputation repelled mainstream financiers like Warren Buffett and JPMorgan Chase & Co. Chief Executive Jamie Dimon, and made regulators deeply skittish about bank involvement. In time this was bound to change, not because crypto was becoming useful but because it was generating so much profit for speculators and their supporting ecosystem.

Several banks have made private-equity investments in crypto companies and many including J.P. Morgan are investing in blockchain, the distributed ledger technology underlying cryptocurrencies. A flood of crypto lobbying money was prodding Congress to create a regulatory framework under which crypto, having failed as an alternative to the dollar, could become a riskier, less regulated alternative to equities.

Now, stained by bankruptcy and scandal, cryptocurrency will have to wait longer—perhaps forever—to be fully embraced by traditional banking. An end to banking crises required the replacement of private currencies with a single national dollar, the creation of the Federal Reserve as lender of last resort, deposit insurance and comprehensive regulation.

It isn’t clear, though, that the same recipe should be applied to crypto: Effective regulation would eliminate much of the efficiency and anonymity that explain its appeal. And while the U.S. economy clearly needed a stable banking system and currency, it will do just fine without crypto.

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