Just in time for Halloween, an easy way to help the young understand basic portfolio management using candy
This will not be a typical Halloween, because it has not been a typical year. My wife and I are several years past the annual ritual of what costumes our kids will have (that is, which ones we will allow them to have). We are firmly in the era of “let’s see much the neighborhood is turning over to new, nice young families, like we used to be.”
So, I have to admit I am a bit out of touch with the Halloween preparation. But naturally, it will be subdued this year.
How not to get tricked by investing: the basics
However, that does not mean we can’t use October 31, 2020 to celebrate a somewhat related, but more lasting ritual: how to teach kids about money. How to earn it, respect it when you earn it, safekeep it, and my personal favorite, invest it!
In this area, I have some experience. Not only from a career of managing investment portfolios, but also from being a Dad. Our 3 kids were spaced apart just enough in age so that we had 1 or 2 of them in elementary school for over a decade.
That allowed me many opportunities to participate in something called “Career Day.” That is where parents come to class for a day, and teach a group of elementary school students about what they do for a living.
Since I didn’t do something cool and identifiable to kids, like being a fire fighter, pro athlete or pet store owner, I had to be more innovative. After all, nothing is worse than being the least popular guest at Career Day. Talk about something that can bring shame upon a family!
OK, maybe that’s a bit dramatic. But I did want to make an impact.
When addressing investing with kids, I think the first important aspect to communicate is the concept of “value.” What is any asset worth? Whatever someone else is willing to pay. That’s a concept that elementary students are very capable of understanding.
The second important concept for young investors is that of differentiation. That’s a big word for 2nd graders, so we have to find another way to express it. “Asset Allocation” and “Diversification” are common buzz words in my industry. However, much of what is passed off as those items is bunk.
Many investors are not as diversified as they think they are. It follows that they must learn how to distinguish between different types of investments. And, to avoid falling for the trap of thinking something is different when it really isn’t.
The third key concept I try to get across with younger investors is that of creating a process. That does not mean it has to be a complex one. That’s the case at any age. The key is to have some repeatable set of steps you go through to make investment decisions.
Wall Street has made this more difficult, not easier
This might all be easier if it were not for the longtime habits of Wall Street firms. The combination of a product-making machine and a rampant sales culture has created too many investment choices, and not enough “best for the investor” thinking. In such an environment, it is nearly impossible for the untrained eye to understand what they are really getting. If that is the case for adults, how do you explain that to kids?
That’s where one of my all-time favorite products comes in. Chocolate. And, I find that in many cases, our youngest citizens learn more easily when chocolate is part of the lesson. And THAT was the key to my avoiding the Hall of Shame back in my Career Day years.
A “fun-size” approach to investing
Each year, I brought in a bag of Hershey’s HSY +0.6% miniatures. 4 varieties, each representing a different type of asset (stocks, bonds, cash and gold). Of course, the latter was represented by the yellow-wrapper Mr. Goodbar.
We engaged in a game of trading, and I assigned fluctuating prices to them. This simulated a “market,” and the students would trade with each other. I played the role of “stock exchange” so as to avoid a free-for-all.
As the game progressed, kids would learn to accumulate a mix of the types of chocolate they wanted. That is, what they valued. Since many of them had just one favorite (in the case of this child writing to you at the moment, it was Hershey’s Special Dark), they ended up with a “concentrated” portfolio. That is, it was not highly differentiated. If you only like dark chocolate, that’s fine.
The “value” of Milk chocolate
However, this was a “bridge” to explaining that in the investment world, how you value something is not the only factor. Y0u also have to assess what the “market” will value. That’s part of why possessing different varieties of chocolate, er, assets at the same time can be less risky. Basic concept, made clearer, of course, through chocolate.
What about the kids who didn’t like chocolate? That meant that they would not put as much value on consuming their assets. However, that had nothing to do with earning economic profits in the “chocolate exchange” that occupied 45 minutes of their life that day in class.
Because, while Warren Buffet and others are famous for investing in consumer businesses that they themselves enjoy, there are plenty of investors that simply view these as financial assets. They don’t have to own a car from the company whose stock they own, or own the mobile phone supplied by the tech parts supplier stock they own. It is about making money and not losing it, as often as you can.
Just the beginning
Any time you can analogize investing to something more familiar, it can be a great educational experience for younger investors. In this case, it was the chocolate. I would welcome more conceptual ideas like this if you have any.
I hope this “taste” of how I tried to provide something of value to the kids on Career Day can be a springboard. After all, we all benefit from cultivating a generation of younger investors that grows up with a solid financial foundation.