TRANSCRIPT OF VIDEO SUMMARIZED BELOW
Intro: What's going on everybody and welcome to the "stock picking game," or at least that's what I'm calling it. In this video, I'm going to take you behind the scenes into my attempt to teach my kids, Ethan who's 9 and Hayley who's 11, about investing. This is a big undertaking considering their birthday money has already been spent 6 months in advance, but I'm up for the challenge. Here we go.
Why a game and why now? Well I just watched in total amazement as GameStop stock rose more than 1,000% in the past few weeks, due in large part to a band of reddit users in the group "wallstreetbets" attempting to inflict pain on institutional investors with short positions in the stock. I saw a TikTok video where a young couple told viewers how they made thousands trading stocks using a proprietary trading system where they only buy when the stock goes up and sell before it goes down. In a follow up video, the couple responded to negative comments regarding the dangers of employing this type of trading methodology by telling their viewers to "eat my butt."
This is the kind of market your kids and grandkids are going to be entering. And I'll bet if they own a smart phone or have a Twitter handle or TikTok account, they've been exposed to at least some of this madness. But kids' thinking and adults' thinking about this stuff is not really that different. I remember having to explain to clients the difference between investing and trading. That trading is more short-term in nature and involves buying and selling a security within a year or so, whereas the "investing" mindset is more long-term. Now, I find myself helping investors distinguish between investing and gambling.
So back to this stock picking game with my kids. I'd planned on doing it for some time, but the recent activity in the market and financial content I've seen on social media compelled me to me to take action now. And I chose a game because investing and personal finance can be boring topics to discuss, especially when your audience consists of a self-proclaimed Fortnite expert and an up and coming TikTok star. My kids need to have fun! They need to be entertained or else they'll lose interest as soon as I say the word "stock."
With this game, I want my kids to learn what investing is, and what it isn't. I want them to appreciate the benefits of delayed gratification associated with investing and not be tempted with the allure of get rich easy schemes they may already come across on social media. I want them to experience the feeling of making money, of losing money and how their own decisions can have an impact on their financial future.
In this video, I am having each of my two kids, Hayley and Ethan, pick no more than 3 individual stocks to invest in. I've already opened custodial investment accounts for them and funded each with $250. Once the investments have been made, we'll together track their performance through December 20, 2021. The account with the best performance will be allowed to take the profits (if any) and spend it on anything they want for Christmas. The other child will have to hold their investment for another year.
First up is my daughter Hayley who'll be explaining why she picked these 3 stocks:
Last but not least is my son Ethan and his stock picks:
Some interesting stock picks to say the least. I can't to see how this all plays out. After all is said and done, here are the 6 things I hope to teach my kids with this little stock-picking game:
1. To understand what investing is
Thanks to my insistence that they save a portion of money they receive from birthdays and holidays, they understand the basic concept of saving money. So in order to explain what investing is, I'll first need to show them how much their current savings account has grown (zilch) and provide them with an alternative option to a money market that may result in their account going up without them having to put more money in: and that is investing in the stock market.
2. How to approach making an investment
First, I explained that they aren't allowed to just pick random companies to invest in. They'll have to do some research and put in the time. Now I'm not going to go crazy with trying to explain EPS and P/E ratios. I want them to think more qualitatively and than quantitatively and keep it simple. They can start by thinking about what they like to buy and consume? What company makes those things and are they public or private? What does public or private mean? What goes into making those things you like to buy? And do you think people will demand more of those things over time? That kind of stuff.
3. To introduce them to risk
My son is a gamer and into PCs so he's well aware of Nvidia, the chip and graphics card making company currently trading at an insanely high multiple after having a record year in 2020. So naturally, that's one of the first investments that came to mind when I told him about the stock picking game. Clearly, he needs to understand the risks associated with buying a tech company in 2021 that's trading near all-time highs! Nothing crazy here like explaining beta and standard deviation, but more like comparing a company like Nvidia to Walmart or Proctor & Gamble, or any company that pays a stable dividend and exhibits moderate growth over time. Now granted, I'm funding their accounts with my money, but someday (age 21), it will become theirs. I decided to add the "spending of gains at Christmas" element to the winner in an attempt to help keep them engaged and become more emotionally attached. I'm curious to see how they'll react, (if at all) if their account declines significantly, if and how frequently they'll ask how their account is doing, and if they're tempted to sell if their stock picks are up or down. Which brings me to the next lesson...
4. How to buy and sell a stock
Gone are the days of paying share price for an individual stock. Now, most brokerages offer what's referred to as "fractional shares" making it easier for investors to access stocks like Amazon whose share price is in the thousands, by buying a fraction of a share. There are many brokerages out there that offer fractional trading...I chose to use Schwab's "stock slices." But getting back to buying and selling for a moment...I want my kids to be able to apply simple arithmetic to determine how many shares of stock they can buy. On the sell side, I'm more concerned with teaching them to buy and hold rather than sell too soon. I doubt they'll even realize when and how to sell, which is why I'm mandating they hold their investments for at least a year (or close to it anyway) and then can make the decision to sell (if they win) and use their profits to buy something they want, or hold. The child who underperforms will be required to hold and may feel like they lost, but as the game continues to next year, I hope to show them the power of winning with compounding and long-term investing.
5. Simply how to calculate performance and percentages
Forget for a moment the various types of time-weighted performance methods. We're going to simply focus on the change in the account as a percentage of their initial investment. They're in 3rd and 6th grade respectively, so getting them to apply division and percentages to real life will be valuable. Further, I hope this will allow me to introduce what an index like the S&P 500 is and use as proxy. When I thought up this game, I wanted their investments to be focused on individual stocks as that's a fairly easy concept to grasp. From there, I will explain how their stock picks are classified in the broader market, thereby teaching them the basics of what an index is and eventually, how index funds and ETFs work.
6. To learn a valuable, new skill not taught in school
Unfortunately, personal finance is not a subject taught in the educational system, and that goes for college as much as it goes for grade school. And if you're like me, your children or grandchildren have been stuck at home for nearly a year now with nothing to do after they've completed their 2 hours of online learning, other than bury their faces in social media. So I'm really hoping this stock picking game will ease them to the world of personal finance. I'm hoping they'll apply some of the math skills they've acquired in school to real life (let's see how well common core really works). I'm hoping to distract their minds, even for a moment, from TikTok and What'sApp and focus on what's happening in the world, and with the companies they've invested money in. And if we can all have fun doing it, that's icing on the cake.
I will continue to post updates on "The Presogna Kids' Stock Picking Game" throughout the year so be sure to subscribe to our channel, our blog and follow us on LinkedIn to keep up-to-date. Thanks to all of you who follow One-Up Financial and watch our videos and we'll see you in the next one.