Homeschool Lesson – Economics and the Stock Market

One of the many joys of homeschooling is that my wife and I can get very creative when teaching a lesson. I designed a course on Economics for the last half of this year, relying heavily on the book Whatever Happened to Penny Candy? It’s a good read, and engenders many of the conservative qualities that we are instilling in our children. We have had a great year learning about inflation, the money supply, why to avoid debt, the reason that coins are no longer made from precious metal, etc. I’m thinking about putting the course outline and weekly homework questions into a product that I can make available to the homeschooling community at large.

For the last four weeks of the year, I decided to add to the curriculum and design a “contest” to teach some principles of investing in the stock market. I invited all three children to participate, and even provided some incentive for them to do well (if there’s not a feeling of true loss or gain involved, the lesson could seem a little less exciting…and less real, as well). The rules that I laid out to them were these:

· You will start with $10,000 of cyber-money to invest (no real money changes hands at this point!)
· You may own as few as zero or as many as five different stocks at a time
· Money not held in stocks will be kept in a Money Market account earning zero interest
· For a $10 cyber-fee per trade, stocks may be purchased at the end of any given day - the student may use day-trade or buy-and-hold strategies
· An e-mail summary, with tables and charts of the account value will be e-mailed to the student each day
· At the end of four weeks, I will pay 1%, in real money, of any account value over the initial $10,000
· Any student with an account falling below the initial $10,000 at the end of the four week period will be evaluated for special chores

The contest was pretty popular when it started – I know that the kids were thinking of their own little get-rich-quick scenarios. Just buy low and sell high – nothing to it. And the timing was in their favor. The contest started about the time that the stock market was at a seven-year low. The Dow Industrial average actually rose from 7841 to 8331 during this period, as it rebounded a bit after the housing and credit crisis. That’s a 6.2% increase in just four weeks.

So how did they do? The trend chart for the biggest stock loser is shown at the right. This child (we’ll call them Child “A”) started out with a pretty risky portfolio, buying a lot of General Motors (GM) when it fell below the $2 mark. After it continued to fall further, there was a hasty action to dump the stock and buy Apple Computers (AAPL) instead. While starting the contest with several risky and hurried trades, this child ate up quite a bit of money just in the overhead $10-per trade fees. In the end, the reported loss was $317. Chore time!

The second child (Child “B”) decided to buy what they knew – a good strategy – and purchased McDonald’s (MCD), Build-a-Bear (BBW) and Disney Studios (DIS). The trend started remarkably well, and this child’s account was in significantly positive territory right up until the last week of the contest. But consumers must have stopped building their own bears, because the stock suddenly took a sharp downturn. The end result – a loss of $99. Not devastating, but Child “B” was a little disappointed, nonetheless. More chores!

The third child – and the winner of the overall contest – has always been the conservative one of the bunch. I wonder if those of you who know our family will be able to guess who it is? This child (Child “C”) chose never to purchase any stocks, claiming that they didn’t like to spend money on “anything that they couldn’t wear!” Even after repeated invitations on my part, and the offer of a couple of free trades, I couldn’t get this one to budge. And in the end, this child had the best short-term stock trading strategy.

What a great learning opportunity for all of us! It is certainly not my intent to recommend explicitly against buying stocks. As this was a short-term contest, it’s probably not a completely fair assessment of trading in the market. But all three of my kids learned some important lessons, namely: 1) there is no get-rich-quick guarantee in the market, 2) at its core, stock trading is really not much different from gambling in Las Vegas, and 3) the person making the trades for a paltry $10 each is the one who really makes the money.

And that would be me. My next task is to create a fabulous summer chore chart.

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If anyone would like to guess who Child A, B, and C are, feel free to leave a comment. I’ll post the answer in a week.

Also, if you are reading this and are interested in having your children participate in just such an exercise (without the real monetary reward!), I am considering offering a five-week, home-school Economics course – daily e-mail stock account updates, along with conservative economics and investing principles will be taught. It will be enough for a quarter’s credit in Economics. Please contact me at alan@banyanconcepts.com if you are interested.