Gongol.com Archives: May 2023

Brian Gongol

May 18, 2023

Business and Finance Be patient and win later

The close of another school year brings along with it plenty of predictable news stories, like those of students accepted to lots of colleges and parents concerned about summer learning loss. Another perennial favorite story archetype is the one about students winning a class stock-picking challenge. ■ On one hand, financial education in schools is a concept that ought to be celebrated and promoted. In the Civil War era, it was often enough to teach a young man (or often, just a boy) how to farm -- and that was the extent of financial education, and why the land-grand colleges of the period remain closely affiliated with agriculture even today. Now, though, skill in farming, a trade, or even a white-collar profession isn't enough. The financial world, even for the individual, is vastly more complicated than it once was. ■ But on the other hand, unless a teacher (or a department) is committed to sticking with a cohort of students through a multi-year program, then stock-picking contests may well be counter-productive. It's useful to learn what stocks are, how much they cost, and how to buy and sell them, of course. But students are prone to getting all of the wrong ideas if their incentives are structured around winning a short-term contest. ■ Warren Buffett had these words about value-driven investing at the 2023 Berkshire Hathaway shareholders' meeting: "What gives the value investor opportunities is other people doing dumb things, and now it's easier to get money to do dumb things...So many people are short-term-focused. Much opportunity still exists for people who can think long-term." ■ But by "long-term", Buffett is talking on a scale of years and decades, not a semester, or even a school year. If a student team had bought shares of Buffett's company, Berkshire Hathaway, at the start of the 2020 spring semester, the price of those shares would have cratered over the course of that semester. Berkshire shares dropped from $226 a share in January to $200 a share by the end of May. That would have looked like a catastrophe in a classroom stock-picking contest. Yet those shares today, just seven semesters later, are up to nearly $330 a share. ■ The prudent move for a long-term investor in the spring of 2020 would have been to keep on buying as prices continued to drop -- the return on the shares bought at the end of that spring 2000 semester would have been even better than on the ones bought when the price was higher at the start of the semester. In other words, the smart long-term lesson is exactly the opposite of the lesson a normal student would have gathered from the experience of losing a one-semester classroom contest. ■ The way to win that contest would have been to buy shares in Zoom at $67 a share in January 2020, for a great semester-long return on a price of $207 a share at the end of May 2020. Today, though, Zoom is back down to about $69 a share -- yielding virtually no long-term return at all. ■ In the end, everyone is measured as a long-term investor, whether it's the result of a long series of short-term choices or (usually) a much smaller number of long-term choices. Merely buying and holding a broad index like the S&P 500 at the start of 2020 would have been a losing choice for a semester-length contest -- but it would have crushed the returns on short-term winner Zoom if held until today. ■ And that's the lesson it's most important to convey to students: Make a few careful decisions, then have the constancy to stomach ups and downs for much longer than a semester. That's how to win in the way that really counts for your finances in life.