All About Investing: Planet Money Summer School (continued)

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Sep 18, 2021
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Investing, Behavioral Finance, Cryptocurrencies

The second season of Planet Money Summer School is devoted to investing—perfect for a personal finance class. (Season one was devoted to microeconomics.) Below find a summary of the last three podcasts (the first three sessions were covered last week), each between 35 and 40 minutes long (with ads) along with a few suggested discussion questions. This might make a great lesson for a substitute teacher or a remote assignment.

 

Session 4: Investing in Bonds

 

Summary:

This episode explains why companies issue bonds versus issuing stock or borrowing from a bank when they are in need of capital. It then tackles why investors invest in bonds versus buying stocks or putting money in the bank. )The key reasons to invest in bonds are to diversify your portfolio, and/or for the income stream that interest payments provide.)

 

Becky with the good yield

Planet money ran an experiment in 2019 buying a junk bond (high-yield bond), which it includes here. They cover bond ratings, which are described as credit scores for companies. Junk bonds are anything below BBB. BB is probably a reasonable gamble, but B gets risky and C is really junk. The episode demonstrates how junk bonds are a good illustration of the risk/return relationship, and then explains how the bankruptcy process works for various stakeholders. The example sets up a very clear explanation of the three types of risk involved in the bond-buying world.

 

Default risk

Inflation risk

Interest Rate Risk

 

Suggested Discussion Questions

1) Why do companies issue bonds instead of raising capital another way?

 

2) Why do investors buy bonds? Is it just as easy to buy bonds as it is to buy stocks? How can individuals easily add bonds to their portfolio?

 

3) After hearing about “Becky,” would you consider buying a junk bond if you could afford to? Why or why not? What criteria would you set for choosing a junk bond?

 

4) Why do so many companies in the oil business fall into the junk category?

 

5) Can you explain the three types of risk involved in buying bonds in your own words? (Default, Inflation, and Interest Rate risk)

 

 

Session 5: Bubbles, Bikes and Biases

 

Summary:

This episode attempts to define and describe asset bubbles. Several bubbles are used as examples, but the most detailed example is a story about the Great British Bicycle Bubble (Mania) in the 1890’s. The episode continues with an explanation of the biases that make bubbles happen.

 

Greater Fools Theory

Herd Behavior

Confirmation Bias

 

The last part of the episode looks at investing in the current day with apps that make it so easy for individuals to participate in the stock market, and how these apps play on behavioral biases to get people to make more/more frequent trades. Confirmation bias is discussed in this context too. Individuals doing research before making an investment decision should be aware of this.

 

 

Suggested Discussion Questions

1) Name some of the features bubbles have in common. What role does innovation play? What about consumers? Investors?

 

2) What is the Greater Fools Theory? What role does this play in market bubbles? Can this explain the meme stock phenomenon?

 

3) Can you explain herd behavior? How is this positive for humans in general? How can it exacerbate a bubble? How is this similar to FOMO?

 

4) House flipping in the 2000’s leading up to the 2008 bust was based on the notion that real estate prices never go down. Which theory or theories are described by that practice?

 

5) Do you think that the democratization of investing (online apps, no fees, low minimums) is overall a good thing? What are the hidden costs? Do you think this trend will lead to more bubbles (think meme stocks) in the future?

 

6) How do investing platforms exploit behavioral biases to get people to trade more (and make them more money)?

 

 

 

Session 6: Crypto and Commencement

 

Summary:

Crypto is the perfect topic to follow Session 5’s discussion of bubbles and the biases that tend to feed them. This episode is devoted to determining what makes something an asset, and what to think about before investing in anything.

 

This final episode uses the story of someone searching for some “lost” bitcoin to explain the technical side of things first. Experts discuss estimates of how much of all bitcoin out there may actually be “lost.” But the meat of the lesson comes in the last section, where experts weigh in on how to evaluate if something is an asset (is it solving a problem?), and if is it something you should invest in (if it solves a problem, and you really understand it, how does it change your risk profile?)

 

 

Suggested Discussion Questions

1) If you apply the criterion for something to be an asset, in your mind, is bitcoin an asset?

            What “problem” do you think it solves?

            Do you understand what it is well enough to explain it to someone else?

            How would the risk of owning bitcoin impact the overall risk of your   portfolio?

 

2) Which behavioral biases (from session 5) might lead you to buy cryptocurrency? How do scammers exploit them to successfully “pump and dump” newly created or less well-known crypto currency? (Check out what happened to LiteCoin after a fake Walmart announcement got nationwide-coverage. CNBC)

 

3) Did it surprise you to learn how much of all existing bitcoin is likely “lost?” If you invest in bitcoin, are you more likely to buy it directly, or buy it through a financial service provider? What is your reasoning?

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.