Do You Know What Stocks Your Children are Buying?

“Do you know where your children are?”

That was a question radio and TV stations in various U.S. cities would ask during the ‘60s, ‘70s, and ‘80s. Residents in places like Boston, Philadelphia, New York City, and L.A. could hear those seven words on a nightly basis depending on when and where they tuned in.

As a father of five, I have to admit, I find the question absurd – especially considering how it would be asked at 10 or 11 p.m.

Believe me when I say I understand no parent is perfect. We all make mistakes, and sometimes those mistakes are pretty epic.

I also get that some children ignore parental input more than others (more on that later). However…

Shouldn’t parents be aware of their children’s locations so late in the evening as a general rule? Isn’t that supposed to be one of the basic tenets of parenthood?

Do we really need a reminder to do our job?

A much more reasonable area of bewilderment, in my opinion, is how to teach your children about investing. I don’t just mean the importance of saving and spending wisely, but actually growing those savings significantly.

Otherwise, how many young adults start their first post-collegiate jobs knowing nothing about how to utilize their 401(k)s, much less putting together a personal portfolio on their own?

The stock market can be the greatest wealth generator most people ever encounter – IF they know how to utilize it.

So, perhaps here’s a better question: Do you know what stocks your children are buying?

It Starts With Stressing Hard Work

All my children were young when my commercial real estate development business came to a screeching halt. My youngest was even still in diapers, so she doesn’t remember the chaos like my then-school-aged kids do.

They had to switch from private to public schools, forego the luxurious vacations they’d grown accustomed to, and start living on an all-around intensely changed budget.

Gone was the easy life. And, to some degree, I think that was a good thing, difficult though it was at the time.

I think I always emphasized the importance of earning money to them. Coming from a less privileged background myself, I took pride in modeling the value of hard work and financial independence.

But those qualities are a lot easier to stress – and more effective – when money doesn’t come rolling in automatically.

Today, four out of five of my kids are in the workforce in some way, shape, or form. My second daughter is a stay-at-home mom to my grandson, which is a job in and of itself.

My two youngest are still in high school, and my son (the middle child) is in college. So, all of them have their part-time gigs bringing in cash to spend or save as they so choose.

My oldest daughter, meanwhile, now works for The Wall Street Journal, a chip off the old block. In fact, back when I began my stock analysis business, she was my first and only employee.

I say this not to brag (although I am exceptionally proud of my children), but to stress that they all know the importance of delayed gratification. They don’t just get piles of cash to do with as they please. They have to put hours of effort into achieving that money.

And that is an intensely important piece of investing.

Obviously, you have to say no to some spending in order to have money to invest. In fact, the more you want to have tomorrow, the less you need to spend today.

Those who learn this lesson especially well also understand that the world’s fast-profit schemes are rarely worth their time. Ninety-nine times out of 100 – or perhaps even more – those opportunities turn out to be traps.

In which case, I guess I could have emphasized delayed gratification a bit better for my son. He had to learn the hard way a few years back…

An All Too Typical Investing Tale

I hate to pick on my son this way, but like I said before, no parent or child is perfect. And trying to pretend otherwise is pointless.

I also have to add that he gets more than a few traits from me. He’s intelligent, goal-oriented, and “determined” (read: stubborn).

Combine that with the standard folly of youth, and you’ve got all the ingredients for a very big loss.

It all began in March 2021 when my son hit the jackpot while gambling online. $75,000 is a big deal for almost any adult, much less a 19-year-old, so I’ll admit I was in shock when he showed me his winnings.

So was he.

Now, if I had won that in 2021 – well after I’d learned my lessons and ditched “the standard folly of youth” – I would have put it into strong, steady, dividend-paying stocks that would grow into something even bigger.

It would have been beautiful!

Instead, I tried to consider his unique interests and situation. The result was a suggested balance of “cooler” real estate investment trusts (REITs), like data centers, along with companies like Tesla (TSLA) and Apple (AAPL) – the kind he wants to buy products from.

That could have been beautiful too, but it didn’t happen either.

My son, you see, was obsessed with non-fungible tokens (NFTs) – a market that was admittedly booming at the time. NFTs, for those of you who missed the craze, are digital collectors’ items that range from images to videos, currency, and online gaming assets like weapons or armor.

In March 2021, NFT artist Beeple’s Ocean Front, for example, sold for a whopping $6 million.

“What is Ocean Front?” you might be asking. Well, it’s a digital image of, I believe, an abandoned oil rig in the ocean, piled with shipping containers. A large tree is then shown growing atop it all in an apparent triumph of nature.

And that wasn’t even the biggest NFT sale of the year. On November 9, another Beeple piece went for $28.9 million.

Seeing those big numbers, I understand my son’s interest. Then again, seeing how exuberant the space was, I also wasn’t surprised when it came crashing down the following year.

As for my son’s big winnings, they lasted even less time, gone almost as quickly as they came thanks to poor investments and more online gambling.

I’m very much hoping he’s since learned his lesson.

How to Talk to Your Children About Investing

How could my son have avoided that far-from-fortunate conclusion? Really, he didn’t even have to listen to me; he could have gone straight to a source that taught me so much of what I know today…

The Intelligent Investor by Benjamin Graham.

If I’d read that a little earlier in life, I probably could have avoided my own financial catastrophes. That’s why I tell everyone – my kids and college students alike – that they should read it.

Only my college students listen to me more on this one. Because, you know, I’m not their dad.

The book is filled with game-changing advice, including its cautions on margins of safety. This principle involves buying an asset at undervalued prices.

Or, to put it another way, it’s taking advantage of distressed situations. If we’re talking about stocks, for instance, this could be for a number of reasons, such as:

• Some small misfortune being blown out of proportion.
• An unfair comparison to an underperforming competitor.
• Its entire sector being ignored in favor of something more exciting.

Graham, who’s known as the father of value investing, wrote an entire chapter devoted to the subject, including this explanation:

The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future. If the margin is a large one, then it is enough to assume that future earnings will not fall below those of the past in order for an investor to feel sufficiently protected against the vicissitudes of time.

Translation (since the book was published in 1949): The deeper the discount a valuable asset is trading at, the less risk you have of losing money no matter what comes your way.

As the story of my son’s big win and equal loss shows, you can’t dictate all of your children’s choices. Nor should you. They have to learn for themselves.

But educating them about healthy investment habits should be one of the many gifts you give your kids…

Right up there with knowing where they are at 11:00 p.m.

Regards,

Brad Thomas
Editor, Intelligent Income Daily