Over the next few weeks, teachers across the country will be registering high school students to take part in the ASX Sharemarket Game, which lets players 'experience what it is like to invest in the stock market'.
I disagree with that. If investing were anything at all like this game, there wouldn’t be a stockmarket in the first place.
Each year over 70,00 students participate. For the vast majority, it’s their first introduction to investing. And that's a great shame, because if you wanted to design something that taught young minds the essence of poor investing, this game would be a great starting point.
Stockbrokers, living high on the hog of a 1 per cent commission, once solely owned the ASX. You can imagine how the lunch where this idea was first mooted went, a table of crusty old blokes pondering ways to turn newly minted adults into frenetic, share-price obsessed traders paying 1 per cent each time they yelled ‘sell!’ into the blower.
"I’ve got it!", mumbled George. "How about a game pitched at the kiddies? Teach ‘em how to trade like monkeys and get ‘em hooked but make it ‘educational’ so the teachers don’t smell a rat. Rope in a few thousand students and in a few years we can stop worrying about the blessed school fees."
In a country where little attention is paid to financial education it seems churlish to pick on one of the few programs that attempt to address this shortfall. But after 30 years of miseducation, claims that students will ‘learn how to research companies, discover the importance of wise investment and gain a greater knowledge of economic and world events’ simply don’t stand up.
The problems start right out of the box. The next game, due to start on 21 August, runs for 10 weeks. This ridiculously short time frame turns the game into a lottery, encouraging people to take huge risks with their virtual $50,000, breaking the laws of commonsense investing in the process.
Why bother with stocks like Cochlear, Flight Centre, and the banks when some grunting halfwit could pick the next Sirius Resources, up 3500 per cent in a year, and run out the winner through sheer luck?
We wouldn’t give students learning about probability $50,000 in play money to punt on a 20-1 shot in the 2.30 race at Flemington would we? So why does the ASX Sharemarket Game let them put the same amount into four speccy gold stocks to learn about investing?
If you’re in any doubt as to the motives behind this game, the trading rules clear them up. Time and again studies reveal that the more people trade, the worse they do. Indeed, previous winners of the competition don’t trade anywhere near as much as the rules permit. High-volume traders pay more in transaction costs (broking fees and tax) and tend to make more emotional, less effective decisions that adversely affect performance.
Nevertheless, the game is riddled with the temptation to over-trade. Students can buy and sell up to 20 times a day. Isn’t that more likely to make students think investing is all about buying and selling quickly than learning the benefits of the compounding of dividends and selecting good businesses at fair prices?
The diversification rule is just as misleading. Students cannot buy shares in a company if the total value of the purchase exceeds 25 per cent of the portfolio’s value. That suggests in turn that a portfolio of just four stocks is adequately diversified.
But it gets worse. If one of the stocks goes for a bit of a run and breaches the 25 per cent limit, the rule no longer applies. Players can start with a really poorly diversified portfolio and end up with one where one stock might constitute 90 per cent of it and still win the comp.
As for helping students ‘learn how to research companies’, the dominant feature within the game is a charting tool where students can plot moving averages and the like on stock price charts. If you want to learn how the company makes money, its strategy and growth possibilities, you have to go elsewhere.
So here’s the strategy to win this year’s game.
First, ignore all those big, steady stocks that have been growing for decades and paying dividends. What you want are companies in volatile sectors that have a chance of skyrocketing in 10 weeks. Think mining, energy and biotechnology - companies that might be on the verge of a big gold discovery or a new treatment for cancer.
Second, forget about diversification - in this game it’s a handicap. Picking 10 stocks that double in price is more difficult than picking only four. Invest in the bare minimum number of stocks.
Third, don’t trade too frequently. The four stocks in your portfolio are just as likely to go up as four others that aren’t. Don’t waste money changing your mind about your picks because it will make no difference. Purchase four stocks, hold them for 10 weeks and hope for the best.
Finally, do not hold cash. Unlike in real life where cash let’s you take advantage of opportunities, here it just limits your scope for capital gain. Be fully invested at all times because it’s the only way to win.
Finally, don’t let a good performance go to your head. You were more lucky than most, not smarter. Do not mistake luck for skill.
And if you lost? Well, take the very opposite of the lessons those crusty old blokes thirty years back intended; that incessant trading, poor diversification, short time frames and excessive speculation won’t line your pockets, although they will line those of your broker.
John Addis is the founder of Intelligent Investor Share Advisor (AFSL 282288). To unlock all of Share Advisor’s stock research and buy recommendations, take out a 15-day free membership.