The Wall Street Journal’s five-week newsletter course includes our best lessons for understanding how to invest in the stock market, from how to pick a stock to why diversification matters.

This lesson plan, written by Bradford Gibbs of Brown University’s Economics Department and a professor contributor to WSJ, highlights key learning objectives and provides questions for classroom discussion. There’s also a host of additional related concepts and resources for reinforcement and extension.

To bring this interactive newsletter course to your classroom, ask your students to sign up for the WSJ Investing Challenge using this link: https://www.wsj.com/newsletters?sub=448

The Challenge delivers one edition a week to your inbox. It starts when you sign up.

The WSJ Investing Challenge

Lesson Plans

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Week 1

Stocks' value over time

Essential Questions Learning Objectives

Key Terms/Concepts

• What returns has the stock market generated historically?

• Is there a right time to invest and, if so, when?

• What comes to mind when you hear the term “stock market?”

• What is stock?

• What does it mean to own a share of stock?

• What rights, if any, are conveyed with stock ownership?

• What factors do you think drive share prices over time?

• What events do you think led to the significant variation in returns among the time periods referenced in the Challenge?

Students will obtain an understanding of the relative performance of stocks versus government bonds over time, as well as an appreciation for the risks associated with attempting to time the market.

Market timing - understanding the risks of attempting to beat the market

Compounding - understanding the benefits of accrued returns

Questions for Discussion

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• Compare the following scenarios: buying the S&P 500 on Jan. 1, 2020, and selling on March 31, 2020, versus buying the S&P 500 on Jan. 1, 2020, and holding it through today.

• Discuss the impact of the pandemic on the economy and on the markets during the first half of last year.

Questions for Discussion (continued)

Additional Topics to Explore

Week 1: Stocks' value over time

The Rule of 72 - understanding compounding

Stocks vs. Bonds - understanding securities

Measuring Risk - understanding volatility

Further References

Khan, Sal. “Compound Interest Introduction and the Rule of 72 for Compound Interest.”

Malkiel, Burton. A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing. W.W. Norton, 2003.

Siegel, Jeremy. Stocks for the Long Run (Fifth Ed.). McGraw-Hill Education, 2014.

Sharpe, William. “Likely Gains from Market Timing.” Financial Analysts Journal, Vol. 31, No. 2 (March - April, 1975), pages 60-69.

Shiller, Robert. Irrational Exuberance. Princeton University Press, 2000.

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Essential Questions Learning Objectives

Key Terms/Concepts

• How are stocks valued?

• How does one choose which stock(s) to buy?

Students will obtain an understanding of selected stock market investing basics, including investment strategy, multiples valuation, and di�erentiation between growth versus value versus Growth at a Reasonable Price (GARP) investment styles.

Growth vs. Value vs. GARP

Price/Earnings ratio (P/E)

Price/Sales ratio

Questions for Discussion

Week 2

Stock selection

• How are stocks valued?

• What represents an expensive stock versus a cheap stock?

• What are P/E ratios? What are they measuring?

• What other statistics or ratios would be useful to evaluate when considering which stock(s) to buy?

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Additional Topics to Explore

Efficient Markets Hypothesis - stock prices and information content

Fundamental vs. Technical analysis - evaluating drivers of share price performance

Present and future value - compounding of returns and discount factors

Beta - measuring volatility

Capital Asset Pricing Model - measuring risk and return

Dividend Discount Model - stock valuation

Gordon Growth Model - stock valuation

Three- and Five-Factor Models - isolating relative stock price performance

Further References

Fama, Eugene. “Efficient Capital Markets: A Review of Theory and Empirical Work.” The Journal of Finance, vol. 25, no. 2, 1970, pages 383–417. JSTOR.

Fama, Eugene and French, Kenneth. “A Five-Factor Asset Pricing Model.” Journal of Financial Economics, 116 (2015), pages 1–22.

Farrell, James. “The Dividend Discount Model: A Primer,” Financial Analysts Journal, 41:6, pages 16-25,

Graham, Benjamin and Dodd, David. Security Analysis (Sixth Ed). McGraw-Hill, 2008.

Lynch, Peter. One Up on Wall Street. Simon & Schuster, 2000.

Sharpe, William. “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk.” The Journal of Finance, Volume 19, Issue 3, Sept. 1964, pages 425-442.

Questions for Discussion (continued)

• Pick two stocks in the same industry (i.e., Home Depot and Lowe’s or Coca-Cola and PepsiCo) and compare and contrast selected income statements, balance sheets, and valuation metrics. Is one more expensive than the other and, if so, why?

Week 2: Stock selection

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Essential Questions Learning Objectives

Key Terms/Concepts

• What is “cognitive bias” and how do forms of cognitive bias relate to our understanding/interpretation of probabilities and investing?

• What percentage of your portfolio should you invest in any one stock (i.e., how much money are you willing to lose)?

Students will obtain exposure to the Kelly Criterion and its relevance to investing.

This unit also o�ers an opportunity to explore various aspects of cognitive bias and behavioral finance, including, in particular, the work of Daniel Kahneman and Amos Tversky on loss aversion.

Loss aversion - the psychology of gains/losses

The Law of Small Numbers - understanding the pitfalls of jumping to conclusions

Gambler’s Fallacy - incorrect intuition about the laws of chance

Kelly Criterion - probability and bet sizing

Questions for Discussion

Week 3

Risk management

• “Chance does not have a memory.” Do you agree/disagree with this statement?

• Review and discuss a list of cognitive biases and examples of when you might have encountered/experienced any of them.

• Are gambling and investing the same thing? Why/why not? 6

Further References

Kahneman, Daniel, and Tversky, Amos. "Choices, Values and Frames," American Psychologist, April 1984, pages 39, 341–350.

Kahneman, Daniel. Thinking, fast and slow. Farrar, Straus and Giroux, 2011.

Kelly, John. "A New Interpretation of Information Rate." Bell System Technical Journal. 35 (4), pages 917–926.

Konnikova, Maria. The Biggest Blu�. Penguin Press, 2020.

PIMCO. “Recognizing Your Behavioral Biases.” Accessed July 5, 2021.

Tversky, Amos, and Kahneman, Daniel. “Belief in the Law of Small Numbers.” Psychological Bulletin, 76(2), pages 105–110.

Zweig, Jason. “Dear Investor, That Cocky Voice in Your Head Is Wrong.” The Wall Street Journal, Aug. 24, 2018.

Zweig, Jason. “Are You an Investor or a Gambler? The Stock Market Knows.” The Wall Street Journal, Sept. 11, 2020.

Additional Topics to Explore

• In 1913, in the Monte Carlo Casino, the roulette wheel rolled “black” 26 times in a row, thus coining the term the “Monte Carlo Fallacy.” This event o�ers an opportunity to explore a number of concepts related to probability and statistics, such as “statistical independence,” and, by extension, to the stock market (and concepts such as “random walk theory.”)

• Behavioral finance is a burgeoning field and there are numerous opportunities in connection with the Investing Challenge’s Baseball Game to explore various forms of bias that can influence investors’ behavior (and decision-making, more broadly).

• Every advertisement for a financial product usually includes a disclaimer along the lines of the following: "Past performance is no guarantee of future results." However, investors will always look at a stock or fund’s past performance before buying it. Discuss this phenomenon.

Questions for Discussion (continued)

Week 3: Risk management

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Essential Questions Learning Objectives

Key Terms/Concepts

Students will obtain an understanding of the benefits of a diversified portfolio.

This unit also provides an opportunity to introduce a number of statistical concepts (variance, covariance, standard deviation) and to discuss portfolio construction and concepts ranging from the capital asset pricing model (CAPM) to modern portfolio theory (MPT).

Variance, Volatility, and Standard Deviation - measuring risk

Diversifiable Risk vs. Nondiversifiable Risk - di�erentiating between firm risk and market risk

Efficient Markets Hypothesis - share prices, information content, and signaling

Sharpe Ratio - comparing risk-adjusted returns

Capital Asset Pricing Model (beta, market risk premium, and the risk-free rate) - evaluating risk and return

Modern Portfolio Theory - optimization of reward vs. risk

Week 4

Diversification

• Why should an investor consider owning a broad stock portfolio as opposed to a few individual stocks?

• What are the benefits of diversification?

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Questions for Discussion

Additional Topics to Explore

Understanding the relationship between risk and return is no doubt a foundational concept of investing, and depending upon the time available, this unit o�ers an opportunity to backfill and unpack the relationship between expected returns and a firm’s cost of equity capital by way of an exploration of the Capital Asset Pricing Model.

In addition to stock selection, this unit provides an opportunity to explore asset allocation and to augment a discussion around stock diversification with the incorporation of cash and bonds--thus, introducing Harry Markowitz’s Modern Portfolio Theory.

• Which investment is riskier, a 10-year U.S. Treasury note or a share of GameStop? Why? How are you measuring risk?

• What additional return, if any, would you require to motivate you to own a stock versus a U.S. government bond? Why? How did you derive that number?

• Choose a single stock. What risks would you be exposed to if you allocated 100% of your investible assets to that stock?

• Now assume that you allocated 50% of your investment to another stock. How would your risk exposure potentially change?

• What types of risks do you think are diversifiable? What types of risks aren’t?

• Compare the performance of one or the other of the two stocks you chose to the overall market (such as the S&P 500) over a historical 1,3, 5, and/or 10-year period. How would your stock have fared compared with the market?

• Choose 3-5 stocks that you think have promise. Tape the share price tables from The Wall Street Journal and throw 3-5 darts. Monitor a portfolio of your stocks against the dartboard portfolio and the S&P 500. See which portfolio delivers the best performance over the next 1-2 quarters.

Week 4: Diversification

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Further References

Bodie, Zvi; Kane, Alex and Alan Marcus. Investments. New York: McGraw-Hill/Irwin, 2018.

Elton, E.J, and Gruber, M.J. "Risk Reduction and Portfolio Size: An Analytic Solution," Journal of Business 50 (Oct. 1977), pages 415–437.

E*Trade. “The Power of Diversification.” Youtube.com, Uploaded by E*Trade on Sept. 25, 2012.

Jasen, Georgette. “Journal's Dartboard Retires After 14 Years of Stock Picks,” The Wall Street Journal, April 18, 2002.

Lintner, John. “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets,” Review of Economics and Statistics, Feb. 1965, pages 13-37.

Markowitz, Harry. “Portfolio Selection,” The Journal of Finance. 7 (1) (March 1952), pages 77–91.

Mossin, Jan. “Equilibrium in a Capital Asset Market,” Econometrica, Oct. 1966, pages 768-783.

Sharpe, William. “Capital Asset Prices: A Theory of Market Equilibrium,” Journal of Finance, Sept. 1964, pages 425-442.

Sharpe, William. “Mutual Fund Performance,” Journal of Business. 39 (S1) (Jan. 1966), pages 119–138.

Statman, Meir. “How Many Stocks Make a Diversified Portfolio?” Journal of Financial and Quantitative Analysis 22 (Sept. 1987), pages 353-363.

Week 4: Diversification

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Essential Questions Learning Objectives

Key Terms/Concepts

Students will obtain an enhanced appreciation for the benefits of adopting a longer-term outlook when making investment decisions.

Students will recognize the potential pitfalls of chasing returns and/or perceived stability.

Behavioral finance - exploring the psychology of investing

Compounding - understanding the benefits of the long-term accrual of returns

Market timing - analyzing the pitfalls of seeking to “time the market”

Efficient Markets Hypothesis and economic anomalies- evaluating various well-worn Wall Street investing strategies, such as the “January E�ect” and “Sell in May and Go Away”

Questions for Discussion

Week 5

Perseverance

• What is the Efficient Markets Hypothesis (including its various forms) and how does it relate to the concept of long-term investing?

• Explore the concept of “technical investing.” How would a proponent of the Efficient Markets Hypothesis seek to argue against believers in technical analysis?

• Why invest for the long-term?

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Additional Topics to Explore

Questions for Discussion (continued)

• Do you think buying stocks is easier or harder than selling stocks? Why/why not?

• The stock market’s performance during the pandemic o�ers an opportunity to illustrate the potential risks of buying high and selling low. For example, have students compare and contrast the stock market’s performance assuming one held a portfolio of stocks beginning on Jan. 1, 2020, and sold it in mid-March 2020 versus holding the same portfolio through today (similar to the exercise proposed in Week 1)

• Consider asking students to research the career of John Bogle, founder of Vanguard. What was his contribution to retail investing in the U.S.? What were the key tenets of his investment philosophy and why?

• Choose one of Warren Bu�ett’s “Letter to Shareholders” from the last 10 years. Ask students to characterize his investment philosophy in terms of short-term versus long-term orientation and the underlying rationale?

• Taxation and investing would be a useful extension topic, given short-term versus long-term capital-gains tax rates and the impact of taxation on compounding. Ask students to calculate the returns on two portfolios assuming a series of buying and selling in one versus long-term reinvestment in the other.

Further References

Akepanidtaworn, Klakow; Di Mascio, Rick; Imas, Alex and Schmidt, Lawrence. “Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors” (Sept. 1, 2019).

Barber, Brad M., and Terrance Odean. “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment.” The Quarterly Journal of Economics, vol. 116, no. 1, 2001, pages 261–292. JSTOR.

Bouman, Sven, and Ben Jacobsen. “The Halloween Indicator, "Sell in May and Go Away": Another Puzzle.” American Economic Review, 92 (5), 2002, pages 1618-1635.

Week 5: Perseverance

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Fama, Eugene “Efficient Capital Markets: A Review of Theory and Empirical Work.” The Journal of Finance, vol. 25, no. 2, 1970, pages 383–417. JSTOR.

Hulbert, Mark. “A Summer Stock-Market Strategy: Invest Defensively.” The Wall Street Journal.

Malkiel, Burton. A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing. W.W. Norton, 2003.

Malkiel, Burton. “The Efficient Market Hypothesis and Its Critics.” Journal of Economic Perspectives 17 (1), 2003, pages 59–82.

Samuelson, Paul. “The Long-Term Case for Equities.”

The Journal of Portfolio Management Oct. 1994, 21 (1), pages 15-24.

Shiller, Robert. 2003. “From Efficient Markets Theory to Behavioral Finance.” Journal of Economic Perspectives 17 (1): 83–104.

Siegel, Jeremy. Stocks for the Long Run (Fifth Ed.). McGraw-Hill Education, 2014.

Thaler, Richard. “Anomalies: The January E�ect.” Journal of Economic Perspectives, 1 (1), 1987: 197-201.

Further References (continued)

Week 5: Perseverance

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