What teenagers really learn from stock market games

Each year, more than one million high school students in the United States learn about investing through stock picking games. If you have teenagers, they might be playing this spring.

Proponents say these games are exciting and stimulate interest in investing.

We could also make driver education exciting by teaching kids how to run red lights and hit brick walls. I suppose you could even argue that the survivors could become better drivers.

Of course, that’s not how we teach teenagers to drive. But when it comes to investing and “financial literacy,” millions of teenagers are learning what it’s like to take wild risks, using play money—often compounded by more fantasy money borrowed—to create a barrage of fast trades with tumultuous ones fire assets.

Over the long term, investors who diversify widely, avoid unnecessary risk, and trade infrequently will almost certainly be successful. Teens who behave this way are almost certain to lose in these stock market competitions.

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

Emma looked at which stocks had just gone up the most, then shorted them to take advantage of any declines. “Anything that was skyrocketing when it just looked like hype, we sold short,” she says.

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

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

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

Or lose money – which is why Warren Buffett repeatedly warns investors against using leverage.

Mark Brookshire, founder and CEO of Montreal-based Stock-Trak Inc., which offers the stock simulation that Emma and Zach played, says more than 500,000 students in grades K-12 are participating. Most only play as part of a class, not in a larger competition.

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Teachers can limit the number of trades, restrict margin or prohibit short selling. Outside of state competitions, Mr Brookshire said only 14% of teachers allow margin – so most portfolios are not leveraged. During the typical 10 week course, the average student makes 22 trades.

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

Ryan Monoski, a former economics teacher at Montgomery High School in Montgomery, Pennsylvania, doubts that lesson.

In 2016 and 2017, his teams won the national championship in the Capitol Hill Challenge, a stock selection competition run by the Sifma Foundation, a non-profit organization supported by the brokerage industry. His teams have also won the Pennsylvania State Championship at least a dozen times.

All of these competitions “motivate students to take extreme risks, which 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, amplifying daily market moves by 4.5x.

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The Capitol Hill Challenge no longer allows all this.

But sessions of the Sifma Foundation’s stock market game, which runs in all 50 states and is played by 600,000 children annually, can enable short selling and lending on margin. Teams often only own five stocks at a time, which isn’t nearly enough diversification by prudent investment standards.

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

Richard Daly, the foundation’s chairman, says the organization shares concerns that the game could teach children to take too many risks. But, he says, “we don’t want to lose the greater good of all the kids we touch who wouldn’t otherwise get to the stock market” at all.

My driving school teacher taught me to put safety first and yours probably too. For this, children who learn how to invest should be rewarded. They should not be declared “winners” because they take enormous risks that could lead to lifelong misconduct.

write to Jason Zweig at intelligentinvestor@wsj.com

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