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Teaching Kid About Investing

Incentives - Not taught in school but kids can understand them

Never, ever, think about something else when you should be thinking about the power of incentives.

- Charlie Munger

What do you want your kids to know that they don't get in school? My first answer would be "behavior" and not in the sense that my son's kindergarten teacher uses, but in the sense of understanding the basics of human behavior generally and incentives in particular. This topic has big ramifications on investing, politics, and life generally.

529 - Tax-efficient savings that can offer a challenge to your kids

As I described in an earlier post, I would recommend placing up to $370k in Nevada's 529 program for various tax reasons. I made the additional commitment to my son to give him half of any money that I save due to any merit-based academic or other scholarships that he is able to secure.

Education - Warren Buffett (NYSE:BRK.A) is a great place to start

We started by watching Warren Buffett's "Secret Millionaire's Club" together. It was a great place to start in terms of ideas on investing and manageable businesses for kids. This was a good fit for 2- and 4-year olds, but has ideas that are still appropriate at 6.

Odd Lots - Throw around your (lack of) weight

We really try to focus on how small scale can be an edge. The two best tactics so far have been in odd lot opportunities and in mutual's deposits. Thus far, these have proved to be lucrative - great risk:rewards and limited downside but not scalable. For <$100k kids' accounts, they can be among the best opportunities. But the question of how to make $10k out of $5k is very different than making $1 bil out of $500 mil so you might as well take advantage of all of the quirky opportunities strewn around the capital markets.

Press - What is describing/causing euphoria or fear?

We selectively read the Journal together. We generally focus on the questions of

What is overrated? and

What is underrated?

We come up with a list of companies and tickers so that we can follow our ideas and track their performance. If it matters to you, then measure it.

Casinos - A perfect laboratory for learning about (mis)judgment

Once a kid gets the basics of behavior, incentives, and misjudgment, then casinos can be a great place to learn. They restrict kids' access, but you can still make it to the periphery of the floor. Take your kids someplace with other activities, such as Tahoe, but let them see a casino up close or at least as close as they are allowed to get.

  • How are customers being manipulated?
  • Who is being tricked?
  • What senses are they using?
  • What emotions are being triggered?
  • Who is making good decisions?
  • Who is making bad decisions?

When my son was four, he came up with many more answers than I thought of. This is part of his armor that he is building up because it is harder to manipulate someone when they understand how manipulation works. Since Casinos are masterful at these tricks, there are many to discover.

Audacity - Rely only on primary sources

Anyone can ask but only some bother.

Many primary school teachers seem to be truly lovely people who are great at teaching my kids reading, writing, and arithmetic, but schools are not necessary (or even helpful) when it comes to teaching boldness. One activity that I've added to my kids' curriculum is this - when they read a book or play a game that we like, they sit down and write the author or designer a letter with our views and a few questions. So far, everyone writes back and it is fun to get responses from people they respect. I want them to get into the habit of getting in front of the people that matter in their respective fields. For example, this morning, we were talking about Minecraft, so my son sat down and dashed off a note to its creator complimenting the game, asking a series of questions, and indicating that he would be interested in investing if the designer ever is looking for capital (I happen to know that it is a private company and the designer doesn't need capital, but the point is to rely only on primary sources; if I told my son the "right" answer, I hope that he would ignore it and get it from the computer programmer directly).

Lion Investments - Disclosure: Portfolio Manager Just Turned 6

Today my son launched Lion Investments. The PM will devote some of his energy to this endeavor, but he unavoidably splits his time between investing, baseball, and kindergarten. He learned what he could from Warren Buffett and Bill Ackman. He also learned about some of the great American businessmen from the nineteenth and twentieth century - men such as Ford, Rockefeller, Carnegie, Morgan, and Vanderbilt. These men are typically ignored or vilified. Instead, we ask the question, "what can we learn and what is worth celebrating and emulating?" The answer, of course, is "not everything", but there still is much to learn. Having the right heroes can make a big difference.

He found eleven companies that interested him. One is reasonably likely to fail, but it could be an interesting lesson. The portfolio is a bit heavy on toy-related names, but each had a thesis, some research, a plan to follow up, and a view of how they might be mispriced. Some are beaten down which brought up the idea of mean reversion, which is a pretty intuitive concept for kids. You can follow his picks here, if you are interested. Finally, if you want to set up a similar account for your kids and you accept this invitation, both my kid and yours will get $100 added to their accounts. That plus the 0.2% that Lion Investments is up on its first day as of this writing would not be a bad way to start.