You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

See my pictures in Instagram, @teguhidx.

How to Educate Children to Invest in Stocks

In my book 'The Calm Investor' (published in Bahasa Indonesia), I said that a child can be taught to invest in stocks since the age of as early as six years. And a friend then asked, how? Because, even an adult usually find it hard to learn about stock investing, let alone a young children? But what if I told you that a young children can learn more quickly than adults, and are more likely to make a significant profit in the future?

First, to analyze stocks is actually not that complicated, as you only need to using simple math like add, subtract, multiply, divide, and percent. And for the children, they are very good at simple math like that. For example, I have a nine years old niece who, if I ask, what is 8 multiply by 9? She can quickly reply, seventy-two!

While adults? Just try yourself, what is 7 multiply by 8? Can you answer it quickly without the help of a calculator? Well, most people can’t. I often met with investor who, although he has received explanation, but still confused about how to calculate the price-to-earnings ratio (PER), whereas the formula is very simple, ie the share price divided by earnings per share (EPS), while the EPS itself is net income in one year, divided by the number of outstanding shares of the company.

But if I explain about the PER formula to college students, they usually can easily understand.

Second, an adult is easy to panic. If he bought shares worth US$ 10,000, and the price fell 5%, or in other words he has lost US$ 500 (though still floating), he will immediately panic, as if these 500 bucks were enormous (while in fact he had US$ 10,000, so the US$ 500 should be a small number, isn’t it?). Similarly, if the shares rose 5%, then he would rush to sell it to secure the profits, fearing the stock would go back down. Etc.

And such behavior is very understandable. An investor, whoever he is, when he deposit some money into his trading account, then the money is his saving, the proceeds of his job in months or even years. So what if some of the money is gone simply because you buy the wrong stock?

For grown up people, there is nothing more frightening than losing money, and this fear often causes them to act irrationally (eg buying boiled-stocks, or sell stocks simply because there are bad rumors, etc.). A few months ago in Jakarta, the Provincial Government enforcing the rules of fine of Rp500,000 (about US$ 50) for motorcycles who illegally enter the Trans-Jakarta lane, and send the police to the street to catch the law breakers. And just because of not willing to pay these fines, dozens of motorists who enter the Trans-Jakarta lane forced themselves to lift their bikes off the track as they saw the police, although the act was clearly dangerous for their own safety.

But it was a story of adults. While little children? Well, they are more afraid of insect or gecko than losing money because, what’s the problem if they lose their money? They can simply ask for another from their parents. So when they are directed to invest in stocks (of course, by using small money first), they will not be easy to panic when the stock index or their stocks fluctuate, but rather ignored it. As a result, they will rationally buy and sell stocks based on logical analysis that was made before, and it will eventually generate a consistent profit.

In short, if the child has a competent mentor to guide him in investing, then he or she will have a far bigger opportunity to become a major investor someday, compard to adults who need to return to the 5th grade of elementary school to learn multiplication, in order to analyze the stocks. In the book The Calm Investor, I said that a child could be taught to invest in stock from the age of 6 years, because at that age a child usually can read, write, and do a simple math. Only indeed, some children may only start to invest at the age of 9, 10, or 12 years, but it's okay, because at those ages they are still young enough to be called ‘kid’.

Okay, then how to educate our children to invest? Here we go!

First, for the early stage, teach them to buy and to have goods that are useful for a long time, instead of buying goods that can be used once only and depleted, like food. This is the basic concept of investment. A simple example, usually mothers like to buy clothes of a little larger size for their toddlers, with the hope that the clothes would still enough for their children until 2 or 3 years to come. Well, in this case when I go for a walk with my little girl (age 4), for example, to the mall, then surely she would ask to buy this and that, and I will offer: Which one would you like to buy? A lollipop that you can eat once only and may make your teeth ache, to ride a play-train but only once, to buy colorful balloons that would be deflated or burst, or an Elsa doll that you can play every day at home? Fortunately, she always chose the latter.

A children playground in Bandung, West Java. Every one or two weeks, I regularly bring my kids to places like this. We call this quality time investment

Second, after your children have understood the importance to own some goods (read: assets) that are useful for the long term, you can further teach them about the value of the goods, and then ask them to buy it at a price that match the value, or even lower. And this is the basic concept of value investing. When Carlos Slim Helu was 9 years old, his father began to give him a sum of money regularly every weekend, and in the next week he will be asked, what the money has been used for. If Carlos buy something which the value is lower than the price paid, for example, buy a bottle of drink at the price of several Pesos at a store while the exact same drink in other stores were cheaper, his father would rebuke him. Two years later, at age 11, Carlos did his first investment by buying government bonds of Mexico, where the value of the bond rose steadily from year to year due to compounding interest, so that he fulfill the duties of his father: To buy assets whose value is higher than the price paid.

So when your child is already understood the concept of 'price vs. value', he or she will be able to master the principles of value investing with ease, and will be able to find good stocks which are sold at discounted prices. At the age of 12 years, Carlos Slim bought his first stock, ie the shares of a major bank in Mexico, after he learnt that the bank's equity has risen consistently from year to year, so he was able to see that the value of his investment will rise significantly in the next few years. Carlos continued to buy shares of the bank once every few time, and three years later, at age 15, he had became one of the largest minority shareholders in the bank.

Okay, then why we should teach our children to invest? Well, of course there are a million anwers for that, but I will only mention one: Investing in stocks is a lifelong career without a retirement, or even longer if you are able to delegate the job to a successor, in this case your offsprings. As with Carlos Slim, actually the job of investment had been started by his father Julian Slim, but it was Carlos Slim who 'finish' the job to be one of the richest people in the world.

But of course, some children may have a passion of his or her own, including I myself would not force my two kids to follow their daddy’s path of career, if they prefer to be a painter or singer, for example. Including Warren Buffett himself has decided that he will not give up the position of CIO of Berkshire Hathaway to his son, Howard, but to one of his proteges, Todd Combs. Nevertheless, the above basic capabilities ie 1. To have an asset, and 2. To buy the assets at a price equal or lower than its value, in the end will make your son or daughter to live well, whatever their profession. Because as Buffett said, 'It does not matter how much your income. What matters is how much of those revenues that were not merely stop by on your bank accounts, but became a useful asset for the long term'.

Well, so now, are you ready to invest in your most valuable assets, namely your own sons and daughters?

No comments: