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.
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| 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?
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