Why the JSE game does more harm than good to young investors

Like a lot of South African high school students, my first meaningful exposure to investing in shares was when my classmates and I entered the JSE game in grade 11. Like most boys we didn’t take it seriously enough and I’m pretty sure we just stopped playing at some stage!

In the last few years I have started building my own personal portfolio. It was quite an interesting learning experience, as I chose to do my fellowship exam in the investment field. I have tried, as far as possible, to apply sound investment techniques that I learnt from my studies to my own portfolio.

I recently did start thinking about the JSE game that we played back in high school, and I thought about the lessons that it teaches our youngsters. While I applaud the game for its intentions, I feel quite strongly that the structure of the game hinders more than it helps.

A quick summary of the game

There are three versions of the game.

  • Income based

Players are required to protect their assets against inflation and maximise the income earned from that portfolio. Players are not rewarded for asset appreciation over and above inflation.

  • Equity growth

Players are required to maximise their return on a portfolio. They may not use derivatives and can only buy shares in the FTSE/JSE top 40

  • Speculator

Players are required to maximise their return on a portfolio. They may invest in any share and they may use derivatives

The problems with this structure

I actually quite like the structure of the income based version of the game. However, this is only really applicable to very old investors. Furthermore, most students tend to play the speculator version of the game. There are a number of problems with the above structure, most of which come straight out of a text book.

  • There is no allowance for risk in the evaluation of your performance. If players are not penalised for taking extra risk in the assets they choose to invest in, then rational players will simply choose the riskiest shares with the highest expected returns. Investing without factoring in risk is not investing at all.
  • The time horizon is too short. Given that the game takes place over one school year, the actual investment time frame is less than a year. You do not invest for months; an investment is for years.
  • Derivatives can complicate the issue, and they are tools for speculating, not investing. Most adults who use derivatives don’t fully understand them. I think it is a bit optimistic to expect newcomer to the JSE to understand how to use them properly.

My main concern is the first bullet point. A group who do their homework and construct a solid, well balanced and well researched portfolio will more than likely be beaten by a team that just picks randomly risky shares (If enough teams construct very high risk, high expected return portfolios). If enough teams choose very risky portfolios, a lot of them will perform poorly, but some will just get lucky and beat the well constructed portfolios. Is this fair?

The short time frame also introduces a large degree of luck. The shorter the time period, the more random the contest becomes. Investing should encourage you to evaluate the long term prospects of a share. However, if you’re only playing the game for a few months, it is not in your best interest to do this. Effectively, the time horizon effectively forces players to become traders.

What should be done?

I am well aware that the structure of the game is the simplest possible, and any changes will make the game more difficult to understand or run. However, I believe that every South African should start building a portfolio as soon as they start working and they should continue to build it until their retirement and beyond. The JSE game could really help to encourage youngsters to do this.

In order to make this happen, the game needs to:

  • Make some allowance for the riskiness of shares chosen. There are smarter people than myself who should be more than capable of developing a simple and effective risk adjustment to the returns on the portfolio. This in itself will get youngsters to start thinking about risk.
  • Take place over a longer period. It could start in grade 11 and continue for 5 years when the student finishes university. This encourages students to invest and not speculate
  • Ban derivatives! They are poorly understood and complicate the game. If there are institutions that don’t use derivatives because they are too complicated, then the same should apply to beginners.
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