The Wall Street Journal’s ive-week newsletter course includes our best lessons
for understanding how to invest in the stock market, from how to pick a stock to
why diversiication 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 signiicant 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 beneits of accrued returns
Questions for Discussion
2
• 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 irst
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.
3
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?
4
Additional Topics to Explore
Eficient 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. “Eficient 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
5
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 inance, 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?
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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 inance is a burgeoning ield and there are numerous opportunities in
connection with the Investing Challenge’s Baseball Game to explore various forms of
bias that can inluence investors’ behavior (and decision-making, more broadly).
• Every advertisement for a inancial 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
7
Essential Questions Learning Objectives
Key Terms/Concepts
Students will obtain an understanding of
the beneits of a diversiied 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
Diversiiable Risk vs. Nondiversiiable Risk - dierentiating
between irm risk and market risk
Eficient 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 beneits of
diversiication?
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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
backill and unpack the relationship between expected returns and a irm’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 diversiication 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 diversiiable? 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: Diversiication
9
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 Diversiication.” 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 Diversiied Portfolio?” Journal of Financial and
Quantitative Analysis 22 (Sept. 1987), pages 353363.
Week 4: Diversiication
10
Essential Questions Learning Objectives
Key Terms/Concepts
Students will obtain an enhanced
appreciation for the beneits of adopting a
longer-term outlook when making
investment decisions.
Students will recognize the potential pitfalls
of chasing returns and/or perceived stability.
Behavioral inance - exploring the psychology of investing
Compounding - understanding the beneits of the long-term accrual of
returns
Market timing - analyzing the pitfalls of seeking to “time the market”
Eficient 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 Eficient 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 Eficient
Markets Hypothesis seek to argue against believers in technical analysis?
• Why invest for the long-term?
11
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, Overconidence, 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
12
Fama, Eugene “Eficient 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 Eficient 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 Eficient 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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