The Motley Fool: The Fribble, Middle School Fools, by LynnTheNovice

Friday, July 24, 1998

Middle School Fools
by LynnTheNovice
([email protected])

About six months ago, I had the pleasure and privilege of teaching a group of middle school students. It was an unusual situation in that I am not a teacher by profession, and the students were home schoolers. These twenty students (including my oldest son, an 8th grader) met at the home school resource center twice a week, where they could interact and socialize with each other, and receive some education outside of their usual home school curriculum.

I had offered my services to the home school center earlier that year, and was given the go-ahead to teach a six-week class for two hours a week. Using my background in accounting and finance, I designed a class I called "Intro to Finance," which was intended to teach some basic concepts in the area of personal financial management. The class topics included how to make money in the teen years, taxes and insurance ("life's little bummers"), budgeting, spending, credit cards, saving, rates of return, compound interest, and investing. It was a lot of material to cover in twelve classroom hours, so I needed to keep the concepts fairly simple and try to hammer home the main points (like: Start saving early!).

I had read articles about students in other schools playing the "stock market game," so I thought I would incorporate some stock market concepts and terminology into the class by allowing the students to design their own stock market portfolio to follow for six weeks. Each student would have an equal amount of money to buy stock in one company of their choice. After discussing the U.S. stock market and how it came into being (some great history from Peter Lynch's books), I distributed a list of sixty stocks to give the students some ideas for their stock selections. The first half of the list was the "Dow 30," and the second half a random selection of names such as toy manufacturers and "fun food" companies that I thought the students may find of interest., although they were not limited in their selections to the choices on the list.

We "purchased" shares in each of the twenty selections at the closing price of those companies' stocks on January 15th. There was not a name in the portfolio that I didn't recognize. There were a handful of Dow stocks, a handful of tech stocks (we live in Silicon Valley), one internet company, three clothing manufacturers, four food companies, and a restaurant chain. My own son, who I expected to buy something like Hasbro or Toys 'R Us, chose Microsoft (I had forgotten how he idolizes Bill Gates!). For the most part, the students chose companies whose products they really liked and were familiar with in one way or another.

Each week, we briefly reviewed the portfolio's performance as a whole, measured against the Dow Jones and S&P 500 indices. We discussed the reasons why a stock's price may be going up, down, or staying flat. After six weeks, the portfolio had turned in a stellar performance, but then so had the market overall. I explained that their portfolio's short-term performance probably couldn't be sustained consistently, but that a reasonable goal was to beat the market indices over long periods of time.

Fast forward six months. It's summer; school's out. I found myself reminiscing about our portfolio this week, and thought I'd check on its performance. Wow, as of July 15th, the market is still delivering some outstanding results, with the S&P up 23.6% from our initial investment date. But guess what? The portfolio's return is a whopping 34.2%! How are these students doing so well? Okay, the internet pick just happened to be Yahoo, up 177% since January 15th. Even without Yahoo, the port returned 26.7%. But why should I exclude Yahoo? In any typical twenty-stock portfolio, there will probably be a few losers and a few shining stars. Our only two losers so far are Sara Lee, down 4.6%, and "Dow Dog" AT&T, down 8.3% (and only then just recently). The other big winners? Apple Computer, up 79%, Microsoft, up 76%, The Gap, up 71%, and Home Depot, up 59%. Even the smallest company in the port, who lost ground those first six weeks, returned 48%. (This is Odwalla, the juice company associated with the e-coli breakout in their unpasteurized apple juice, causing at least one death. Lawsuits are all now settled, and they are starting to make a profit again.) At least four of the companies in our portfolio (Disney, Microsoft, Compaq, Home Depot) have split their stock in the last six months.

I'm not recommending that anyone build a portfolio by taking a stock selection survey at their local middle school. But there are a lot of lessons that can be learned from this story. For me, they are things like: You don't need a portfolio full of exotic small caps to easily beat the overall market. If you invest your money well, you can just leave it alone (buy and hold) and it will grow quite nicely. Buy names you know, products you use and like, businesses you understand. And by the way, since I taught this class, my own personal portfolio has been performing much better.