Feb 29, 2016

24 Hours of Personal Finance - Investing in Ravioli Den (Day 3)

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Friday was Investing Day #3 at Eastside College Prep. My learning objectives today were to have the students experience the roller coaster psychology that comes from stock ownership. With over 57% of the class indicating “I think I can make investments that beat the market,” I thought it was time to introduce a little humility to the class. If all the data I could muster couldn’t convince students of the difficulty of outperforming the S&P500, maybe Jessica’s favorite activity, Joining the Market, could.

First some background on Ravioli Den (a fictitious company that Jessica created):

Ravioli Den owns, operates, and licenses Ravioli Den restaurants in the United States and Canada. They sell 14 varieties of ravioli, 9 different sauce options, and garlic bread. All meals are prepared fresh on­site. Ravioli Den was founded in Cleveland, OH’s Little Italy neighborhood and has expanded to 60 locations across the US. Their initial growth strategy was to open Dens adjacent to college campuses and give discounts and coupons to students, though they are now expanding in other locations due to their success.

After handing out the Project Worksheet, I reviewed the Key Statistics on Ravioli Den so students could get a sense of the volatility they could expect to experience in owning this stock (check out the 52 High-Low prices).  I then projected onto the screen the presentation that I would walk through with this project (email Laura if you’re a teacher and need access) and helped the students complete their Investment Tracker (see the Project Worksheet) for Period 1 in which all students purchased 30 shares of Ravioli Den at $60/share. Anna (our co-teacher) provided students with the opportunity to “ease into the investment” and didn’t require a 30 share purchase.

The reason I like the Investment Tracker is that it helps students see the interaction between cash and stock.

  • When they purchase stock, they use cash and receive stock in exchange.
  • When they sell stock, they receive cash in exchange for their stock.

Game play

For each period of the ten-period game, students were given an update on Ravioli Den with the news being delivered while the stock market was closed. Students try to predict what the impact of the news will be and whether they will want to buy or sell shares in the company based on that information. Here is how the first few rounds proceeded (Round 1 involved students purchasing 30 shares at $60/share):

  • Period 2: Students get stock price information on Ravioli Den which shows a declining stock price over the course of a week from roughly $53 on Monday to $49 on Friday. With this information, what do they want to do on Monday?
    • It took a few rounds for students to figure out that best to buy when prices are low and sell when prices are high. Many had the natural inclination to want to sell with this set of news as they were worried that prices might drop more. They experienced a form of capitulation when the pain of loss seems so great that you feel the need to sell your shares. Many were uncomfortable with the lack of certainty and felt uncomfortable. Since they all had purchased 30 shares in Round 1, they had no excess cash to purchase and many sold into the weakness.
  • Period 3: Food poisoning at local Ravioli Den with no evidence of issues at other restaurants. Students immediately saw the similarities with Chipotle and wondered if this would have broader impact on the RD chain. No consensus on whether to buy or sell shares.
  • Period 4: CNBC video describing how fewer Americans are eating fast food. Students got to experience first-hand what passes as “expertise” in the financial world as several analysts described the overall fast-food trends and what stocks they liked as a result of these trends. It seemed funny to some students that the terms fast-food and healthy were spoken in the same sentence. We also discussed how McDonald’s recent change to “all day breakfast” had a dramatic impact on their business. Since Ravioli Den was smaller chain, they would likely be less impacted by these macro trends.
  • Period 5: Ravioli Den named of the top 5 Favorite Fast Food Restaurants. Almost all students felt that this was bullish news for the company and many chose to sell their stock.

At this point, the bell rang (this was 45 minute period). Students left class discussing how taxing it was to go through the ups and downs of stock ownership….

 

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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