By Paul Petillo
I am about to break into the top 25% of the contestants currently enrolled in CNBC's Portfolio Challenge. Not that it means anything to anyone but me. I certainly do not expect to win the tax-free prize of one million dollars.
There are, as I write this, 101 thousand players in the fake game of stock picking that are doing better than my to-date total return of 4.71%. Neither the website nor the daylong business programming have yet to tell us how far ahead of the pack the leader actually is. This early in the game, it could be a mere percentage point or two.
Nonetheless, I check it everyday upon my return from work. My wife asks, somewhat interested how I am doing. Last night, she asked how long the contest last, understanding that if I win, I will keep my promise and turn the lump sum over to her presumably to pay off the mortgage and finish financing her retirement.
This game however uncovers a basic child-like ability to pretend. Imagine the ability to control a million dollars without the consequence of explaining to loved ones that 'hey, I lost the nest egg!" This exercise in stock picking predates the Internet, which has allowed investors to test their abilities with hypothetical portfolios without the pain of loss and the exhilaration of success. Our school children play a similar game of risk, which is designed to introduce students to the language of the markets without the reality of the cost.
Nothing warms the hearts of investment community more than the thought of training young students to be investors. The question of whether this is necessarily a good idea seems to be pushed aside as economics classes across the country come online to participate in the Stock Market Game.
Since the inception of this interactive program in 1977, over 8 million students have, according the web site, allowed tight budgeted schools to combine many different core studies into an exciting game. The mission statement on the site reads: "The Stock Market Game is a trademark of the Foundation for Investor Education, a nonprofit organization dedicated to developing and providing learning resources for investors of all ages, raising the level of investor awareness in the U.S., supporting research programs, and advocating the advancement of investor education."
That foundation is a front for the Securities Industry Association, which was established in 1972 through the merger of the Association of Stock Exchange Firms and the Investment Banker's Association. That coalition seeks to bring together the shared interests of more than 600 securities firms to accomplish common goals.
Sounds noble enough, doesn't it, even without the shadowy existence of Wall Street in the background? But what would we think if the world poker tour took a similar approach? It too could use such savvy core studies as sociology, math, and perhaps even intro to psychology as a reason to instruct students in the fine art of when to fold, when to hold and how to read a bluff.
Perhaps not but the subtle insinuation that this game will teach students something other than how to be good brokerage clients, leads me to ask, who is the course really designed to educate?
Brokerage houses are basically chasing pennies when the take the fine art of stock trading to our impressionable youth. They understand that there is little chance that the game will actually give these kids much more than a workable vocabulary and quite possibly a thrill or two in the process. The ten-week course much like the grown-up version offered CNBC contestants does not develop expertise or foster the growth of investment styles.
The game however might see the input, however innocent, as parental kibitzing.
Seeking advice is a two way street. Good advice must come from someone trusted enough to take the blame if the advice was erroneous with the person who takes the advice also admitting, if unwittingly, that the results of the decision should be ultimately theirs. Just like in the real world, those fortunate to have accounts where brokers will actually use the vast research and analysis departments to give you the cutting edge, it is the investor who must make the decisions and the broker who must take the blame.
But these kids do not have the time to do the kind of research necessary to make anything more than a semi-educated guess which in offshore parlance are a wager, a bet, and a gamble. And who should they turn to for advice?
CNBC offers an hour-long look at what the pros "might" do on Friday evenings. It is lively and entertaining and should convince everyone watching that the pros would never invest the way they suggest. Not even a hedge fund manager would bet the farm on a $2 stock, divest themselves of all their holdings at the end of each day or chase earnings reports in the hopes of a significant one day pop in a stock price.
During the game, students are given a hypothetical $100,000 (CNBC gives us a million dollars to work with). This money is invested into the market accompanied by some rudimentary economics words and theories. But giving them the language of the commentators rarely gives the students the savvy they need to adjust long term thinking into short-term results. In fact, long-term investing puts the competitors at a distinct disadvantage.
Short-term triumphs, as many "pros" know is based on lack of an indiviudal stock's liquidity. Too many people chasing a small amount of available shares can propel a company¹s share price through the roof. CNBC has a $500 million capitalization limit which if you are looking for a $2 stock limits your options.
There is prevailing notion that suggests that if you take out all of the booms and busts, you will get a more normalized view of the markets. Then all you need do is add in diversification and you can be assured of beating all market cycles instead of just one. Neither game emphasizes such nuances and for long-time investors, it is just these kinds of subtlties that make all the difference between gains and losses.
The rules of both games eliminate practices as short selling or investment in ETFs.
But let's not kid our students and our- grown-up-selves. These games are a pleasant academic diversion that might just make economics a little easier to swallow. But they are mostly unrealistic with little to offer than bragging rights or in the grown-up version, a sizable cash prize. And although my wife cheers me on from the sidelines, we should be honest with ourselves that this game is not a life lesson anymore than Texas Hold 'em is a sport.
