Tutoring Younger People (Ahem. First Time Investors) On How To Invest Money

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Includes: AAPL, JNJ, MCD
by: Investment Pancake
Summary

A free spreadsheet to demonstrate the power of compounding.

A free Google Slide Show to go along with the spreadsheet.

Some random thoughts and musings about the European bias against investing in equities.

Do you know how hard it is for young people in Europe to find a permanent job? Seriously! Jobs in Europe used to be fairly steady things. You'd get hired after you graduated from university, stay with your employer for all or most of your career, and then end up with a pension for the rest of your life once you retired. Today, young people in Europe have to scramble to line up temporary gigs and side hustles. It seems like almost all of them strongly depend on the open borders across the EU to make their personal economic lives viable. For example, I recently met a young Portuguese woman who took a waitressing job at a hotel in Ireland, where the minimum wage is like 4 times what it is in Portugal. Once tourist season is up, she plans to bounce over to Spain or Germany to take on a temporary gig at a language school (she said she speaks 5 languages fluently, which I believe). Her ultimate plan is to use geographical arbitrage and work in high-paying areas of Europe so that one day, she can afford to move back to Portugal where jobs are both scarce and scarcely paid.

Virtually every single young person who I speak with here in Europe tells me the same thing about what worries them the most: they will never be financially independent. Many feel like they've been completely shut out of the system. They're almost resigned to it, in fact. See, I was talking about this just the other day with my French instructor (who is in her mid-twenties, who happens to be German, and who has worked in a wide variety of short-term jobs across Europe, including France, and now, Portugal). On the sense of impossibility that she feels when it comes to landing a great permanent job at a great company like Apple (AAPL) (she worked for a time as a "genius" at the Apple store in Paris), I just had to ask her the following question: "instead of working for the company, why not just own the company? You don't have to depend on anyone else deciding whether to hire you - instead, you can hire them. With the click of a mouse, you can buy Apple stock and then the place is yours and everyone there works for you."

To young people in Europe, this concept is about as foreign as eating peanut butter and jelly sandwiches. They simply don't do it. Instead, there is this vague sense that companies are entirely autonomous entities with their own agendas. It makes sense to everyone that at the end of every ownership chain on Earth, there is a human, but when it comes to young people in Europe, the ones I know seem to feel like companies must be owned by a shadowy group of unknown, elite individuals who exist in the shadows someplace where the majority can't see them. And they're screwing everyone else over, too. Think feudalism... except you can't exactly pinpoint where the manor home or castle is physically located.

So we talked about the question of exactly who "they" are. "They" are all the shareholders. Click that buy button just once, and you're no longer at the mercy of "them." You instantaneously become one of "them." You know how the old saying goes, right? "If you can't beat 'em, join 'em. I say if you can't join 'em.... own them."

That notion seems to resonate (at least with one certain member of this generation of young people who feel somehow locked out of the system, and like they have no prospects of ever using the system to get ahead). But still, it's a big logical leap to from there to what I'm talking about.

She wants to know. "But.... okay, so, if I own a stock in a company like Apple, isn't that just gambling?"

If you're a young person in Europe, that's probably what your parents told you.

So you come back with a rhetorical question. "Is it gambling if you and your family own a big private company, like maybe Rothschild vineyards? No? So tell me what's the difference between owning a large private company versus a large public company?"

Pause for dramatic effect. Let the question sink in for a moment.

"Basically zero. The only actual difference is that unlike a private company, you don't need permission or special contacts to buy shares of a public company. Private and public companies are the same thing because every cent the company earns belongs to the shareholders, and what follows is that if the company makes money, the shareholders do, too. Whatever some maniac happens to be willing to pay for your shares at any given moment literally has zero impact on the company's earnings and, by extension, yours. I mean, if I and a bunch of people showed up offering to buy the Rothschild vineyards for 100 Euros, they'd laugh and go back to making money. That's exactly what I do when the stock market comes along and offers me $100 for my shares of Apple, or some other great company I own."

This concept of stock as a fractional interest in an actual business is not intuitive or obvious to everyone in Europe. My French teacher's first question was "but why does the company have an incentive to pay anything to shareholders?" My answer: "because the company IS the shareholders. Your question is like asking why would an apartment that you own and rent out to tenants have any incentive to give you the rental checks? Right? The apartment is yours. It has no independent existence from you."

What I've noticed is that when a young European person hears that she can not only break into the system, but actually own it with the click of a button, she can really, really, really seem to like that notion. But that's not really enough, is it. The big problem is gaining financial independence. How can you use the system to do that if it won't even give you a full-time job? That conversation starts with something like this:

"Why are you almost guaranteed to earn far more money as an investor than I ever could?"

She doesn't know.

"Do you want to know the answer?"

Yes. Absolutely.

"It's time. You're young. I'm not. Simple as that. Look. I'm showing her a spreadsheet right now that looks like this:

"Let's see what happens if you own ten shares of a stock like McDonald's (MCD) and ten shares of a stock like Johnson and Johnson (JNJ). These companies pay you dividends of $84 a year today, and I can to a site like DividendChannel.com and see at what rate each company has grown its dividends each year on average starting from 1995 to the present. What if these two companies keep raising dividends at the same rate they've been doing since 1995, and you reinvest all the dividends back into more shares, assuming you get the same yield as you get today on the money you invest. You're 26 years old now, right? How much income will you earn by the time you're 80 years old?"

"Take a guess. A few thousand, maybe?"

Dramatic pause.

"How about this. Try $300,000 a year."

"You say you'll never be financially independent? You're nuts! The only thing that will prevent you from becoming vastly wealthy is if you don't save and don't invest. But that's something entirely in your control, though. It's not up to some hiring manager to make that choice for you."

The system isn't rigged against you. It's rigged for you. At least if you're a permanent owner, which you can become at any moment you want with nothing more than few hundred Euros and some keystrokes.

At my phase in life, nowadays, I know plenty of young teens. Their parents hire tennis coaches to teach their kids how to play. Why not an investment coach to teach them how to save, invest, and become financially independent? Tennis is great, but I have got to think that keeping a roof over your head is at least as important. Particularly in a part of the world where steady salaries and pensions are rapidly becoming a thing of the past.

I started to volunteer to come over to people's houses and teach their kids the basics of how to invest (with the parents too, if they want). There's a huge demand for this stuff from not only the parents but the kids, too. In law, there is a long and storied tradition of pro bono work. I like the idea of bringing that tradition to the finance industry as well. Plus, I have a hard time really trusting anyone who has anything to sell (especially if they wear an expensive suit).

But it's almost impossible to convince someone of the power of compounding with words, so what I have been doing is actually teaching how to program the spreadsheet from scratch. You know, what should go into this column? How would you express that mathematically? With this generation of kids, they figure out how to program a spreadsheet in about 27 seconds. By figuring out for themselves what goes into each cell (sometimes with a little help from their tutor), they develop an implicit understanding and feel for compounding and walk away with a powerful idea that they didn't have before the lesson: you have 100% of the power and responsibility to decide on your future. But it's up to you to save, invest, hold a diversified portfolio of great businesses (big emphasis on the part about "hold"), collect dividends, reinvest, and keep that up for multiple decades even when it's not fun or you have other things you'd rather spend the money on.

"What if I can't find a job and don't have money to invest?" I've heard that one a few times.

Answer? Move back into your parents' house, find a temp gig or a side hustle, and keep saving and investing. Selling stocks to consume the capital is a last resort, and if you're still in the accumulation stage, it's like radioactive airborne ebola virus that's mutated into a zombie-apocalypse-inducing plague. Which is to say, you want to avoid it.

Do you ever think you might want to become an investment tutor? If there is one single pool of qualified investment tutors out there, I guarantee you it's going to be right here in the SA community. Feel free to make and use a copy of the compounding demo spreadsheet for your lesson plan - first page is programmed, second is blank so the students can do their own thinking and program it themselves with your help. Compounding Demonstration For First Time Investors. Obviously you can and should adapt it to your own lesson plan.

I worry that they might start to get squirmy and bored if you just let your voice drone on an on. Not to worry! Try this: make a copy of a Google Slides presentation I programmed. Presentation for First Time Investors (and I suggest you use the term "first time" instead of "young" investor, but see what works best for you. Just click each slide with your mouse as you go along through the lesson and it will cycle through various visual aids. I will start off explaining what kinds of investments exist, where they trade, and how they work. For fun, I'll show a slide of a short-term stock price crash and ask the student to describe what he or she sees (we'll come back to that later). At that point, I'm going to go through a basic example of how to program a spreadsheet. From there, it's on to programming the whole spreadsheet to see how compounding works, and how it can work for the student. And then with the remaining ten or fifteen minutes, it's on to sensitivity analysis. What are the most important ingredients to compounding? Stock price? Time? Spending? The students can rapidly test these questions out by entering numbers into the appropriate cells on the spreadsheet.

My favorite part is where I ask the students whether it's good or bad to lose money and they look at me like I'm completely off my rocker. I have them simulate a 50% crash in the stock price by multiplying the stock price by .5. "Have you just lost a small amount of money today, or made a vast fortune in the future?"

Students see how lower stock prices mean higher yields on their reinvestment Euros... which leads to higher portfolio income and ultimately, higher returns. It's precisely counterintuitive, which is why so many investors are idiots and panic when prices go down. But now you know something that most of them don't. It's why I am completely convinced that You. Can. Do. This."

To close the lesson, let's go back and take a look at that picture of a falling stock now, and you tell me what you see this time.

This is just the first introductory lesson to a world that feels far more open, available and within a person's control than the sparse job opportunities confronting a lot of young people in some parts of Europe these days. Investing for cash flow growth could actually be a way out, but at a minimum, it's likely a path that was utterly mystifying to them before.

Now, since I'm new at this, I'm always looking for constructive criticism, so if you have any, please leave a comment. Or try giving the lesson plan and then let me know how it went. Thanks in advance!

Disclosure: I am/we are long AAPL, JNJ, MCD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Nothing contained in this article, or the attached presentations, is investment advice. It is all for entertainment and/or education value. I am not an investment advisor. No qualifications. No nothing.