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stock-picking contests

Preet Banerjee is a new Globe Investor columnist on all things personal finance-related. He is the author of, ranked the #1 Canadian Investing Blog by readers of the Globe and Mail. He is also the W Network Money Expert.

I'll bet you didn't know that school systems across the country are exposing your children to gambling-inducing behaviour.

That's exactly what's happening when someone thinks it's a good idea to teach them about investing through stock-picking contests. The premise seems harmless: Bring in someone to discuss the stock market, and then set up a competition between students to see whose portfolio of stock picks has provided the best rate of return over a certain period of time.

In my very humble opinion, this might be one of the absolute worst ways to kick-start someone's investment education.

The competition must have a short duration as the students aren't going to be in that same class for ever. This means that anything taught about fundamental analysis is useless. Perhaps the facilitator does an admirable job explaining a financial statement and how that analysis, along with other tools, can be used to pick stocks. But we all know that a correct investment thesis can take years to pan out -- because most of us have learned it the hard way.

Another pitfall of the short timeframe is that it encourages a "swing for the fences" mentality. Why pick a blue-chip stock with a fat dividend when you could decimate the competition by rolling the dice with a 300% leveraged ETF? The goal of the competition is not well aligned with real world portfolio goals for most investors. Both of these investments can have their place in a portfolio, but the stock-picking exercise is unlikely to address this. It's go big or go home.

Finally, we can't ignore the rapid growth of couch potato-esque portfolios of index funds. These are viable investment solutions for many investors but, in their very essence, are at odds with stock-picking. With a couch potato portfolio you are essentially buying everything, with the expectation of being average, with less hassles and costs (which, in turn, could translate into being slightly above average at the end of the day). And who can blame the couch potatoes -- maybe they were sick of gambling.

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