Investment Game Tactic Isn’t a Sound Investing Model
Alex was an intern working in our offices many years ago. He was taking an investing class at Midwestern State University where one of the assignments was a semester-long investment simulation—in other words, an investment game. While the money was fake, it used all the investment choices from real life and tracked what could have been the performance. He invited me to join since the game was open to the students and their friends.
For four months he and I “played” the market daily. The financial intern vs the financial sage (a name I gave myself) vs the rest of the class and their friends. He and I slowly pulled away from the rest of the pack, jostling back and forth between first and second place.
With just one day to go, Alex had taken the lead, and nothing was going to get me past him. At least nothing normal. But as I was the sage, I wasn’t limited to normal. While the rules did not allow buying on margin (a way to leverage your investments), it said nothing about buying a security that itself had built-in leverage.
So, with that one day left, I sold all my positions and bought a 3x leveraged stock fund. If the market went up, I’d be in first place, if it went down…let’s just say I really needed the market to go up.
It went up.
Alex graduated and then earned an advanced degree at Texas Tech. He’s a successful Certified Financial Planner with his own firm in the Phoenix area. But while he’s done pretty well for himself, he can’t take that victory away from me.
That said, the lesson I want my readers to take from this is to not do what I did. Well, unless it’s a game, then I don’t care. But in real life this is a very bad idea. You read now and then about a person who took the last money they had, bought a lottery ticket, and won. You don’t read about all the people who took the last money they had and lost.
With leverage you can win big, but you can also lose big. I guess if you have some money you don’t care about at all, and you otherwise might go to a casino to turn it into fun, then sure, leverage your portfolio. But at least a casino might comp you a drink. Brokers don’t do that.
Meanwhile in real life the Securities and Exchange Commission is looking into the gamification of trading at some brokerages. They are trying to make investing fun. But behaviorists will tell you that this doesn’t make a person a better investor…just a more active one.
No problem with having fun, just remember that investing is a lot more than a game.
Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.