What Teenagers Really Learn From Stock-Market Games

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.