While financial professionals hone their skills every day through hands-on work, sometimes it’s also instructive to get back to the basics — by going back to the classroom.
That’s what happened to Matt Sommer, director of retirement strategy at Janus Henderson Investors. In a column for ThinkAdvisor
, Sommer related his experience in guiding an elementary-school class that was competing with other teams to get the best returns from a hypothetical US$100,000 portfolio in two months, reported Financial Advisor IQ
The competition rules restricted the class to only 300 trades, but they could invest in any security. Sommer and the teacher agreed to add other limitations: no trading after a security is bought; no margin trading; no investing in derivatives; and stock pickers are limited to eight to 10 stocks. The approach helped the team gain fifth place, indicating that simplicity can be better than complexity.
Another instructive moment came when one of the class’ stocks dropped 14%. When the students asked if they should sell, Sommer reminded them that they’d have “to be right twice” in that case: once when selling and once when buying again. The class decided to hold it, and its price ended at a less painful 8% loss — which according to Sommer, taught them the value of patience and conviction.
Third was the value of diversification. While Sommer was initially worried that the class would focus on video-game and mobile-device companies, they selected companies across a broad range of industries, including retail and consumer durables. In the end, they had only one losing stock at the end of the two months.
Finally, the team ignored dividends since the two-month horizon was too short. Nevertheless, the fact that some positions yielded dividends made everyone very happy.
“Financial theory informs us that the stock price should have dropped by an amount equal to the dividend, but in behavioural theory that doesn’t always matter,” Sommer said. “People like receiving dividends, as the ‘bird in the hand’ axiom plays an important role in investor behaviours.”
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