Last spring, my daughter (who was then in the fifth grade) brought home what I thought was an interesting class assignment. Grouped into pairs, the kids were supposed to research publicly traded companies, pick the one that seemed like the best investment to them, and paper trade its stock. However, it quickly became clear that there were big flaws in this lesson.
For starters, I asked my daughter what company she and her friend were going to pick.
“Mattel,” she answered.
“Well, because people buy a lot of Barbie dolls.”
Right there we have a problem, folks. Yes, people do buy a lot of Barbie dolls, but is that enough reason to pick this company as an investment?
Kids Aren’t Learning Company Fundamentals
We always joke about how we should buy stock in something when we seem to be using a heck of a lot of it —
especially when it comes to household items. But the one item you buy is just a small fraction of the overall business. For instance, you might buy one particular brand of paper towels, but the manufacturer might also make pharmaceuticals… including a drug that’s about to come under fire from a class-action lawsuit, which sends the parent company’s stock careening downward.
That’s not even to mention that there are a whole host of fundamentals that need to be taken into consideration when choosing a company in which to invest. Are the financials sound, and does the company have a history of delivering a solid performance to its investors? Does management seem to know what it’s doing, and is it keeping up with the times? Or is the company on a crash course, a la Sears?
My daughter wasn’t taught anything about looking at quarterly earnings reports… or even about dividends. Those handy payouts can make a difference when choosing an investment that’s right for you. (Many investors swear by stocks known as Dividend Aristocrats for long-term income plays.)
As I explained to her, yes, Barbie may be popular, but I would have chosen Hasbro over Mattel for a stock. If she had looked further into the company, she would have seen that Hasbro had won the Disney license (which means hot sellers such as Star Wars and Princess branded toys). That’s way more than just one product.
I guess it’s good that the kids are being taught to invest in what they know — after all, that’s one of the most powerful tenets of investing. However, that doesn’t mean you shouldn’t investigate further before making a decision.
Kids Are Learning the Wrong Lesson About the Investing Timeframe
But even Hasbro would have been a less-than-stellar pick for her paper portfolio because of the timeframe that the students were allowed.
The project was assigned in April, giving the students only six weeks at the most to monitor their plays. Unless you’re investing in a very liquid stock, that’s nowhere near enough time to see much of a difference in your value. And it’s certainly not enough time to teach kids how the stock market really works.
This also sends out a very negative lesson to kids — that the point to investing is to see if you can make money in just a few weeks.
Here at Investor Junkie, one of our own tenets is that investing is not for getting rich quick. Rather, it’s for protecting your money and letting it steadily grow, so that by the time you’re ready to retire (or buy a house, etc.), you’ve let compound interest build a tidy nest egg. We believe that investing should be all about improving your future… not gambling it on quick trades. That’s why we will never recommend day trading to our readers.
So, yeah, a big blue-chip company, such as Hasbro or even Mattel, can have a place in your portfolio… but expect to see major growth over a matter of years, not weeks or even months.
How Can We Teach Our Kids Better?
If school is teaching our kids that investing is all about quick gains, without bothering to instruct them in the fundamentals, what’s a more valuable lesson they can learn at home?
First off, they need to understand that investing should be made with the long term in mind. Sure, trading in and out of stocks can be fun, but it shouldn’t be done with money that you can’t afford to lose.
And time is on the kids’ side, thanks to the magic of compound interest. Dubbed the “eighth wonder of the world,” compound interest can help your money grow exponentially. The more time you have to let it do its thing, the more money it will make for you. The earlier your kids get started, the fatter the nest egg they’ll have when it’s time to withdraw that money for their first-time home purchase or even retirement.
Second, they should learn how to do their due diligence before making any market move. Most major companies provide their investor prospectus online—and some will still mail it to you upon request (all kids like to get mail). A middle school-aged child should be able to look at a stock chart and tell if it looks like it’s a steady earner or an up-and-down rollercoaster.
If you’d like to
Ask your kids what they’ve learned about investing at school. Chances are, they may have received some misinformation. However, this is one lesson that can be fun to learn and put into practice at home.
In the Comments section below, let us know what lessons your kids are being or have been taught.