(Disclaimer – Share tips are from my 6 and 7 year old kids, neither of whom are licensed to provide advice!)
Over Christmas my 2 eldest kids, age 7 and 6 were having a chat about owning a business vs working for someone and the benefits/disadvantages and risk/return tradeoff’s of doing so. (Just like any normal parent does…)
The conversation developed from future career aspirations, to a discussion around buying a business now. The kids were intrigued by the fact they were able to purchase part of a business now using their savings. We talked about how their cash in the bank was earning a very small amount of interest, versus the potential of receiving a share of the profit generated by the business and how the value of the company grows over time as the earnings increase. (or drop if earnings decrease!).
My kids like most others collect pocket money, money from recycling cans, doing jobs for the grandparents etc. I proposed to the kids that they each use $1000 each of their savings to purchase shares in a business, and asked them which businesses they wanted to buy.
My 7 year old boy was quick to suggest he wanted to buy Westpac. When asked why he explained that Westpac had lots of branches, that Dad use’s Westpac, and that Westpac had a big building in Adelaide. My 6 year daughter when asked said she wanted to buy Target because “Mummy buys a lot there, so they must make money”. I explained to her she couldn’t buy Target but could buy Wesfarmers who owned Target.
Their logic makes sense – size/scale/macro business analysis/thematic investing. I might have to spend some time with them on how to analyse financial performance another time… Who am I to argue with their logic. Time will tell.
After Christmas we set about setting up an online share trading account. They are both the proud owners of 32 Westpac shares and 24 Wesfarmers shares, both yet to receive their first dividend (which will be reinvested via a dividend reinvestment plan). Since the purchases, the Westpac shares are down 6% and the Wesfarmers up 3%. We haven’t discussed the volatility side of things yet, but as far as they know they own set number of shares and will buy more with the income they get from them, current value isn’t part of the equation for them.
Wouldn’t it be great if schools incorporated basic lessons on investing capital, passive income and compounding early on in our kids education. I’m hoping that for my kids the logic will set in early around purchasing a business for a share of their profits as opposed to investing money in the share market and being at the mercy of volatility. I’m hoping by the time they’re at Uni, their capital will be generating enough income to cover their education costs and they’ll continue to build on them into their adult years… (or blow it all on a cars and holidays?)