On Saturday, May 23, columnist Ron Lieber wrote an article in the New York Times titled, “Financial Wisdom From a New Graduate.”
In the column, he highlighted the undergraduate financial planning program at Texas Tech University, and invited its top student, Madison Nipp, to offer up her financial wisdom to graduating seniors.
Mr. Lieber’s article got me to thinking about the role “education” plays in financial planning curriculums; specifically what they teach students in regards to investing in the stock market.
Whether it is a middle school, high school, or college investing class, all too often the educational system emphasizes the importance of individual stock selection as a critical component to building a successful portfolio.
It might start as a fun “stock-picking contest” in a high school business class. Next thing you know students are learning the finer points of fundamental securities analysis in a college level finance class.
I have first-hand experience of this, because a close friend of mine is currently enrolled in such a class at a local community college, and that is exactly what they are learning.
The textbook this class uses is titled “Fundamentals of Investments – Valuation and Management” by Jordan & Miller. Here are some fancy-sounding stock valuation models outlined in the book.
- The Dividend Discount Model
- The Two-Stage Dividend Growth Model
- The Residual Income Model
Towards the end of the chapter on Common Stock Valuation, the authors write, “How should you, as an investor, put this information to use? The answer is that you need to pick some stocks and get to work!”
That is exactly what the professor has her students engaged in; a surprisingly sophisticated (simulated) on-line trading program, where each student is given a $500,000 trading account and encouraged to make at least 10 trades a week.
Lost in the textbook is a brief discussion of “efficient markets” where the authors introduce index funds and point out the low percentage of actively managed funds that outperform a benchmark.
I find it interesting that the authors allocate a couple of chapters to “security valuation and selection,” and barely one paragraph to the simple concept of index funds.
To the authors’ credit, as well as the class professor, the curriculum covers many other essential financial planning issues, like identifying the different characteristics of various investments, and the role risk management plays in building portfolios.
The tragedy of a focus on stock picking though, is that students who want to become successful investors are brainwashed at a very early age into thinking that common stock analysis has anything to do with becoming a successful investor.
- We teach students to engage in something that is detrimental to their intended purpose of becoming successful investors. It is akin to a personal health trainer teaching you how to smoke on your first visit to the gym.
- We encourage them to spend time on a worthless exercise of securities or mutual fund analysis – time that could be better spent pursuing dreams and careers and building wealth in other dimensions of their lives.
- Most importantly, instead of instilling confidence in these young investors with their investment decisions, we instill in them uncertainty and ambiguity by introducing to them the complexities of stock market investing. As a result, when one doesn’t invest with confidence, there is a reluctance to invest at all.
Whenever I come across a high school teacher or student who talks about a stock-picking assignment the class is engaged in, I want to scream. If investors are to become more responsible and more successful at planning for their retirement years, they have to start saving and investing earlier in life. Teaching them how to pick stocks at an early age is not the way to get them started in the right direction.
Share your comments on the above reflection – your experiences, your observations, with the way we teach our young students to become responsible with the way they manage money and make prudent decisions when investing in the stock market.