Investing like an 11-year-old


I recently helped my 11-year-old daughter buy her first shares of stock. She knows that my job involves the stock market. So over the years she has become a casual student of the game.

She has heard me whoop and holler on a morning when I’ve awakened to find one of my holdings has been bought in an M&A transaction. And she knows a little more profanity than I wish she did – the result of an occasional earnings “blow-up.”

But it was sure pleasing to hear her ask one day if she could take some of her allowance money and move it from her savings account “to the stock market.” Her innocent view of the stock market made me ponder how much I’ve internalized how things work, where “money goes,” what shares “look like,” and so on.

So after I agreed help her, we sat down to select some stocks. Surprisingly, she already had a plan. It seemed she’d heard enough ‘stock talk’ on the TV to tell me with some certainty that she “wanted a growth stock and a value stock.” Cool! So we sat on the couch, fired up her iPad Mini and proceeded to Yahoo Finance.

“When they say ‘growth,’ what is it that’s growing?”

I explained that it usually meant sales or earnings growth. And off we went, deconstructing a whole lot of concepts and words with which I’d perhaps grown too familiar.  Sectors. Diversification. Cycles. Cash Flow. Trying to simplify their meanings, but not dumb those meanings down.

Over the course of a week, we talked most evenings about stocks and markets and commissions and she gamely hung with it. We looked up companies, looked at their growth rates and whether they paid dividends (and whether they generated enough cash to do so). And even though we didn’t have a check-list, we naturally seemed to arrive at framework of investing:

–       Do some research. To me, research isn’t necessarily about learning everything about a company – there isn’t enough time in the day to do that for the thousands of public companies. My advice to my daughter was to check a few key things about each stock you looked at. Is it generating cash flow? Is it burdened by too much debt? Is it in an industry worth being in?

–       Have some growth and income. The conventional wisdom for a young person is to ignore income and go for growth because your time frame is long enough to ride through the volatility. But I think (and told my daughter) that the virtue of having some income-producing stocks at all times gives you a steady supply of cash, so that if the market declines a little or a lot, you can buy more of what you own, or find something new and good that’s temporarily ‘on sale.’

–       Diversify across industries. This was actually easy for my daughter to understand as it is for most people who’ve ever heard about what not to do with eggs and baskets.

–       Diversify across geographies. For this, I tried to explain the concept of currencies and foreign exchange. I don’t think I did a very good job! It was the only time I had to say, “trust me.”

–       Be patient. I told my daughter that I wanted her to choose stocks that she would hold for a full year. Cramer is wrong, I explained: you don’t have to “buy buy buy” or “sell sell sell” something every day. So this would be her version of a “Lazy Portfolio.”

–       Watch your costs. I had to explain what commissions were and how they worked. And since she had only $180 to spend, I decided to “comp” her initial commissions. Even though I went into this thinking of it as a learning experience, that didn’t mean she had to take a 13% loss just to get started. But the upside was it made clear to her how simple transaction costs can eat up your returns before you even start.

To see the stock market again through my daughter’s eyes was illuminating and humbling. So what did she buy? Not much, given her investible cash. But she did manage to acquire two or three shares each of three companies:

  • Cirrus Logic (CRUS); for growth and because Apple is the biggest customer of this semiconductor maker;
  • Telefonica (TEF); for value and the dividend and for the international exposure;
  • Sysco (SYY); for growth – it’s in the middle of buying a major competitor – and for a modest 3% yield.

How’s it going? She’s up about 1% so far since making her purchases in June. Best of all, she seems content to only check the stock prices about once a week. If only I could exhibit that kind of discipline!

July continued this year’s pattern of choppy performance for the Crabtree Technology portfolio. The portfolio fell 3.7% in the month, relatively better than the 6.1% drop for our Russell 2000 (RUT) benchmark but worse than the 1.5% decline in the S&P 500 (SPX). Our internal benchmark, the Merrill Lynch Technology 100 (MLO), also fell 1.5% in July.

The most widely held technology ETF, the  Technology Select SPDR (XLK), rose 1.7% during the month.

To learn more about investing with the portfolio managers on Covestor, contact our Client Advisers at or 1.866.825.3005. Or you can try Covestor’s services with afree trial account.

DISCLAIMER: The investments discussed are held in client accounts as of July 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Investments in securities of small-cap and growth companies may be especially volatile.Past performance is no guarantee of future results.