I really like this analogy, especially while WSB-style "YOLO" has become a life philosophy over the last 5 years.

That said, I wonder if the "fantasy financial league" game can become a lesson by selectively choosing a handful of stocks over a 30 year period. Tell the kids about the economics of the period (let's say the 1960s - 1990s) and provide a few companies with the tickers, names, and descriptions replaced. Watch as the "blown up" stock subsides, but the conservative investor wins in the long-run.

EDIT: I cannot stop thinking about how ubiquitous YOLO as a philosophy has become in the last decade. Everything about life has become a binary of win or lose. Your stock market plays "won" if you are in the green, your tweet "lost" if you did not get effective engagement, your latest commit "won" if the established metrics succeeded after deployment. And then there are the implications in machine learning, where everything becomes a binary "correct or incorrect" assessment...

"EDIT: I cannot stop thinking about how ubiquitous YOLO as a philosophy has become in the last decade. Everything about life has become a binary of win or lose. Your stock market plays "won" if you are in the green, your tweet "lost" if you did not get effective engagement, your latest commit "won" if the established metrics succeeded after deployment. And then there are the implications in machine learning, where everything becomes a binary "correct or incorrect" assessment..."

Much of this is reinforced through perceived and real rampant income inequality. If people think they can't advance without taking disproportionate risks - and they're mostly correct here - you'll start to see that action, and then it gets amplified in the social media atmosphere that we live in today.

I think it is a great idea, but if you want to reward a more sane investing strategy (ie low-cost broad index funds) you could maybe accelerate historical or simulated data and anonymize the ticker IDs?

Obviously there will probably be one lucky YOLO player but you could rank everyone and also factor in risk-adjusted returns.

If you want to end up with the normal retirement strategy you probably want to simulate regular contributions and occasional emergency withdrawals.

If you just have a simulated pile of money and want it to go up, but don't actually need it in the meantime, then the risk isn't important and diversifying too much will just guarantee you lose. The usual math in MPT makes strange assumptions like a normal distribution anyway, so it thinks an asset is bad if it has too much upside risk.

My class did almost this exact exercise in junior high back in the early 90's. Teacher gave us a menu of stock tickers of companies that have been around since 1960, complete with some rudimentary financial info as of 1960. Told us to research the companies and come up with a list of stocks to pretend we bought and held for 30 years. This was before the Internet so we couldn't just sneak a peek at the current prices. The goal of the exercise was to learn about research and ultimately diversification, but our team "won" by simply guessing the stock that was most well-known today, and YOLOing the entire fake money investment into it. Taught entirely the wrong lesson.

It would've been so easy to avoid this, even in the internet age, by just replacing the actual tickers with made up names...

I understand at Bloomberg they’ll do an internal “fantasy financial league”, but they rank by sharpe ratio, which adjusts based on the volatility/risk (something like that).

But that’s such a good point about stock competitions generally showing kids that the reckless gambler wins the most - never thought about that.

I actually had this exact experience in a civics class in junior high school -- in 1979! We pored through the stock listings in a physical newspaper every day for several weeks and recorded our buy and sell decisions. The "winner" bought a penny stock which went from 1/8 to 1/4 in a day (or something like that). And I did in fact learn exactly the wrong lesson from that because 20 years later I lost a fair bit of money in the dotcom boom trying to replicate that strategy.

It is very hard to come up with a teaching strategy that can overcome survivorship bias.

I don't think that is the "wrong" lesson. It's a lesson in risk. But it's not a viable strategy long term for most. I think if you teach the concept of ruin, the chance of going bust, you can help develop a healthy relationship with the concept of risk and investing. It's also pretty easy to show real examples of what risk can cause... "guh"

It was the wrong lesson because the focus was entirely on who made the most money. And because it was funny money, the losers didn't actually suffer any real consequences other than the psychological pain of not being the winner. It flattened the risk-reward curve to the point where there was no real difference between losing 90% and simply coming in second. IMHO that is the wrong lesson (though I also note in passing that it is a philosophy that many Americans seem to subscribe to).

I’ve had two bosses/mentors who aspired to write project management books. Then they would tell me the thesis and I would think, “What? No, that’s not why we are effective.”

Nobody sees the times you didn’t fall down. Someone swooped in and fixed something before it broke. Maybe just in the nick of time, maybe far ahead. The forward thinking person is important to that process. If your management skills may keep that person around or drive them away, then that’s material to your discussion. If it’s neutral, then there’s a whole lot of iceberg below the surface that you’re not seeing.

People can copy your theory and totally fail because they can’t motivate the people who keep the wheels on.

A lot of things work like this. Call it "the lucky chancer game." The winner is likely to be a fortunate risk taker, with a side effect of survivorship bias... the "wrong lesson."

Two thoughts...

First, it's not necessarily the wrong lesson. It teaches a real reality, and results could be interesting... especially if real money was involved. I can see why an accelerated game of "play the market" isn't what a schoolteacher wants to teach. But... if you did want to teach it, I would make the game high repetition. High risk-reward strategies and games are a real thing in the world. I don't think it's bad to learn how to play them.

From the POV of playing such strategies/games, it's a short path to internalizing that "secret sauce" is generally an ingredient in a sequence, and therefore not really one thing.

Second thought... One relevant way to teach kids about compound interest & saving is via "subsidized" interest rates. You might start with 10% per week with very young kids and recalibrate before financial meltdowns happen. This might be the way of getting your teacher friend's "right lesson" across.

Anyway... That "just showing up" is surprisingly often the missing ingredient is also often true, and worth remembering. It just often isn't the ingredient for regular work/school life. We do "show up" for our school and work careers. That's the baseline. The reason, IMO, "just show up" is effective, where it is effective, is that most people don't show up. Everyone is showing up for work, for class. We do have something to show for it, it's not something that's an outlier.

While of course doing a startup is very hard and subject to a lot of unknowable, uncontrollable factors I don’t think it’s quite as dire as a retail investor picking stocks. There’s no “efficient markets” for software products; it’s much more likely that you can spot and exploit an unmet business need near your domain expertise than that you have unique insight into Walmart’s quarterly earnings.

Engineers may have an edge in analyzing company products. But that's not the same as analyzing the company. Not understanding the difference has burned a lot of investors in the past.

Can you give recent examples of investors overestimating public tech companies with great tech?

In the private market we had Theranos, which was completely opaque, but most of the big public failures were business innovations with unimpressive tech, like Groupon and WeWork.

You should not underappreciate the subject area expertise of people who analyze stocks in a particular business area. Many of them learn the subject area at a serious depth, exactly for the reasons you state: the balance sheet does not tell the whole story.

Being a serious researcher is only good for stock picking if everyone else is going to come to the same conclusion, just more slowly. This is not true recently, what does meme stock performance have to do with serious peoples' opinion on Tesla?

Actually, value investing hasn't worked for a lot longer than that, and it's probably because everyone else can see what you can for a public stock.

Knowing the meme environment is a part of the subject area knowledge :)

I mean, understanding a bit about CPU architectures and chip production processes is needed to e.g. choose between INTC and AMD, and some knowledge about cell structures and mRNA is needed to decide whether to invest in MRNA. This knowledge is important, on top of understanding the balance sheet.

Is it necessarily the wrong lesson?

Stanley Druckenmiller: my risk management strategy is to put all of my eggs into one basket and watch it very closely.

It is the wrong lesson, but to prove that to the students, you have to rejig the experiment where their picks are compared to those of a primate picking stocks at random.

For those who don't know: Druck compounded capital at over 30% for 30 years. Never had a down year.

The point is that for the purposes of the lesson the time horizon is too short to know if a student got lucky or made a good decision based on research and the like.

Anecdotally I won one of these leagues in school by picking penny stocks and moving in and out of them a lot. Not the lesson in long term investing the teacher wanted to convey…

I’m no business expert, but this approach seems like a huge gamble to me. Why spend years building a project before the usefulness and public reception is quantified? I’d rather spend a hard few months building something that fails rather than an easy 6 years.

That's not the dichotomy though. Most businesses start with one or a few people making someting useful and building a larger business around it. Like a plumber who learns to specialize in new urban construction and makes enough connections as clients that he decides to hire two people to help with his work.

I don't disagree with you, and which is why I qualified my thoughts with a filter of a "large and growing market". Impossible to fail in such a market if your goal is not to be a billion dollar company.

There is a lot of luck in starting a successful company, but the ideas are NOT all equivalent and don't have equal probability of success. One thing that may be easier than picking winners is avoiding losers. Ever read the book F'd Companies? Most of those are absurd on their face, yet people invested a lot of time and money into them.

I think you may be over-defining what 'work' means.

The OP is a clear example of something that actually works, s/he even mentions some money being made.

If you set the bar for success at 'only an unicorn' - I can see how these can be considered failures. But that's a self-fulfilling prophecy by itself considering the tag unicorn :)

In the statewide stock market challenge I did in HS, my team was second in state because I'm a gamer and convinced them to go all in on Nvidia right as they blew up.

We would have gotten first except the person on who was supposed to sell everything in the last week shorted it instead and it went up 10 more points in that week knocking us down to 2nd.

There is an alternate strategy and it's what V persue: rather than going all-in on single bets, they diversify their portfolios.

That, combined with stop-losses and favourable terms tend to assure winning-on-average.

Individual founders face vastly greater risks, and poorer average returns (in part due to those stop-losses and favourable-to-VC terms).

The OP's advice is reasonable for pre product-market fit startups/businesses. You're adding a lot of risk for very little benefit if you go all in on a product that doesn't exist yet or that customers don't want.

Plus most people never ship anything, which this advice helps to fix.

If it were so simple.

A pizza place may generate more revenue than it consumes in expenses all the time, and barely provide enough for the owners to get by.

A unicorn startup can have its expenses exceed revenue all the time (see Uber) and make its owners very rich in the process.

It is that simple.

Neither a pizza place nor a startup exist in for very long without revenue exceeding expenses.

Even in your own examples, both businesses work. It doesn’t matter whether it’s from low revenue and low expenses or high expenses and high capital injection.

Show me a business where revenue was ahead of expenses, had no debt, and it went out of business because it couldn’t pay its bills.

There’s no amount of surprise gotcha clever but-actuallys that can argue with you’re either making money or you aren’t.