Chapter One: Raising Your Child's Interest Rate
When Danielle was a toddler, she loved to go to McDonald's to eat because French fries were her favorite food. Lynn liked McDonald's, too. Eating there together was a weekly outing. She was also a longtime shareholder.
One Friday afternoon Lynn told Danielle, "I'm glad you like McDonald's so much because I'm a part owner of this restaurant."
"You are, Nana?" Danielle's eyes widened. "I want to become a part owner, too!"
So, in October 1988, Lynn purchased her granddaughter's first share of McDonald's stock.
"I purchased the stock just as a fun thing for her," Lynn says. "She owned only 1.1984 shares, and all we had to show for it was a statement with the McDonald's logo. But it didn't matter. Danielle was so happy and proud. When we took one of her friends along to eat with us, she would say, 'Nana, tell Kandyce that I am a part owner of McDonald's!'"
Ownership bestows more than pride. It gives people a reason to care, a reason to take on responsibility. Watch how a child behaves toward a beloved stuffed animal or a bike of her very own.
Lynn realized she didn't need to explain abstract concepts such as share price, dividends, interest, or even what a stock is. All she needed to do was tap into Danielle's powerful desire to own. If she owned even a piece of a company whose product made her happy, then she'd be more likely to take an interest in what happened to her piece -- her share.
Sure enough, long before she ever understood what a share meant or what it was actually worth, Danielle delighted in having a stake to protect. She wanted to keep track of it. She had watched her grandmother read the newspaper, so before she could even pronounce business section, Danielle was asking to see it at the breakfast table. "I need the business sezhion to check my stock," she'd say. Lynn showed her where to look in the newspaper -- what section, which exchange, which abbreviation -- and pointed out the number to focus on. "I told her that what she wanted to check was the price of her stock share," Lynn recalls. "She didn't understand what a stock price was, but she understood that the higher the number, the happier she should be, so she'd shout, 'Nana, it's 39! Yesterday it was only 37, and today it's 39!'"
As Danielle's interest grew and her loyalty to McDonald's remained, Lynn added additional sums to her account by selling Danielle's U.S. savings bonds. "I wanted to reinforce her learning," Lynn explains, "and I knew that by the time she became an adult, this investment would grow and compound nicely for her, whereas the savings bonds might not even keep pace with inflation."
Not only were savings bonds not saving Danielle money, but they weren't teaching her anything. They didn't involve her. They were too abstract and forgettable. In contrast, investing money -- giving Danielle ownership of a company whose franchises she could see everywhere and whose product she could experience firsthand and enjoy -- was engaging her curiosity. From that initial spark of interest, Lynn knew her young granddaughter would pick up practical skills, and by the time the investment was really worth something, she'd be able to manage it competently.
Eight months after Lynn purchased the additional shares in Danielle's name, McDonald's announced a stock split. What had been 3.053 shares (including dividends reinvested twice before the split) became 6.106 shares -- twice as many. Wow! But even more thrilling was Danielle's response.
"Danielle's excitement grew just from knowing she had twice as much McDonald's stock," says Lynn. "She may not have understood that the dollar value of her holdings remained the same, but in time I knew she'd grasp it. And we had so much time -- Danielle was only four!"
Is toddlerhood the perfect time to introduce your child to the world of investing? It was for Danielle, who was three when Lynn used the visit to McDonald's to broaden her granddaughter's financial education.
Piggy Banks and Lemonade Stands
We started our girls' financial education the way most parents do: We urged them to put their allowance in a piggy bank instead of their pocket. We even encouraged them to pick up pennies off the sidewalk. We helped them open a passbook savings account. We felt that teaching them to save their money was teaching them to manage it responsibly. Saving was such a simple, straightforward concept, after all. It's what our own parents did all their lives, and it's what they taught us to do as children.
Pat remembers how her dad used to give her his loose change at the end of the day. In a few weeks she had enough to roll into paper sleeves. "I always loved doing this," says Pat, "so I taught Shannon how to count money and put it into the stacks before putting it into roller sleeves. We did this at the kitchen table or on a blanket in front of the television." Pat would take the rolls to the bank, with Shannon in tow, and give her the cash. With this incentive, Shannon was rolling money on her own in no time. She spent some and saved some. Even now, years later, coin rolling is Shannon's favorite source of "free" money!
Lynn also used an idea from her youth: She got Danielle to open up a lemonade stand. Every summer until she was about nine, Danielle accompanied Lynn to the bank to take out money from her account to buy supplies and set up shop. After two weeks of working the stand, she had more than enough to pay herself and her assistant, and replenish her savings account. "Pay yourself first, I always told her," says Lynn. "Then put aside something for later."
Both of us wanted our kids to have some sense of money beyond what they saw come out of an ATM machine. We wanted Shannon and Danielle to know the value of a dollar and to get in the habit of putting money aside.
Our approach was very hands-on from the beginning because we knew our kids would understand only what they could touch, see, or play with. Pat let Shannon play with the savings bonds she had purchased for her since birth. They were stashed in a kitchen drawer -- "not the safest place," Pat admits -- and every once in a while Pat would get them out and have Shannon sort them into piles according to face value or maturity date. Shannon started playing this game before she could even count or read but quickly mastered it because it taught her a little of both. "It got so she started telling me how she wanted them sorted," notes Pat, "and I had to follow her directions to the letter."
Our kids learned best whenever they weren't made aware they were being taught. If they were having fun, if they were in our company, and if we didn't lecture or push, they proved themselves good learners. Lynn got Danielle reading at the age of three. Shannon could count and identify coin values before she was in school.
It wasn't long before we realized that our girls were ready to learn a whole lot more about money management than how to put money into a piggy bank or savings account. Saving was simple but not active or engaging enough to keep their attention, whereas investing wasn't all that complicated when you got right down to it. What child doesn't leap at an opportunity to own something? Presented that way, investing was something our girls could get excited about. And if they were excited, they'd ultimately learn everything they needed to know to invest competently, responsibly, and profitably. Teaching them wouldn't be a chore; it would be an adventure.
Let the Games Begin
If you're thinking, "I'll wait until my child shows an interest," before you embark on this trip, you could miss the boat entirely. Many forty-year-olds we know have no interest because no one ever introduced it in a creative way. Investing has never been considered the best material for kids' education; it is seldom taught in grade school, high school, or even college. Although there has recently been a push for schools to start teaching kids about the stock market, everyone agrees that children learn best from their parents.
That's where you come in. You don't hesitate to expose your child to music you love or books you enjoy; you do that by listening to your favorite songs or by reading aloud from your favorite book. Your child will want to know more about things that she sees you care about.
Shannon, for example, "had no more interest in the stock market than a rock," according to her mom. But that didn't stop Pat from sharing her own growing interest in investing. "The stock market was simply something I enjoyed," Pat reflects. "So, starting in second grade, when Shannon was seven, I very casually began to show her the stock page and talk to her about it. Every time I read the page, I'd read out loud. 'Oh, I think I'll check my stocks today,' I'd say on Saturday morning while she ate breakfast at the kitchen table. 'Let me check Washington Gas.' I would look at Washington Gas and then point it out to her in the paper. 'Here's the closing price. Here's the name of the company,' I'd say. I did it repetitively, with maybe four stocks. Each time I'd say, 'Here's the one I'm looking at. I'm going to look at what the closing price is.' I'd read the closing price out loud. I didn't try to explain and didn't intend for her to remember. I'd just verbalize whatever was running through my mind."
About a year later Shannon starting asking Pat to give her the newspaper first. "Tell me the stocks you want to look at," Shannon would say, and she'd highlight them for Pat in pink. Then she'd hand the paper back, and Pat would continue babbling out loud whatever she read or thought as she scanned the stock pages.
By nine, Shannon was reading the paper before handing it to her mom. Any headline with "Disney" in it caught her attention because she loved The Little Mermaid and couldn't get enough of Disney movies and products. She wouldn't give up the paper until she'd given her mom the information Pat was seeking. "Tell me the stocks you want to know about," she'd say to Pat, "and I will tell you the closing price." When The Washington Post ran its year-end summary of stocks, Shannon went through it first, highlighting in pink all the stocks her mom owned and in yellow all the stocks she thought her mom should own, based on how much more the stocks had increased in value during the prior year than the ones Pat actually owned.
Shannon's interest was clearly sparked, so as Lynn had done with Danielle, Pat leaped at the opportunity by buying her a share of her favorite company -- Disney. And as Lynn had come to realize that savings bonds weren't giving her granddaughter much in the way of returns or education, so, too, did Pat come to see that Shannon's savings account at the bank was a poor lesson in money management.r
"We looked at her account, which had been giving her three percent interest," Pat explains. "And Shannon, who's in fifth grade, said to me, 'Boy, we can do much better in stocks!' She understood that the savings account wasn't earning her much and felt much more comfortable with stocks. I'm probably one of the few parents who encouraged her child to close a savings account!"
Pat's experience with Shannon, as well as our experience with the Stock MarKids, makes us think that nine- through eleven-year-olds make excellent students of investing. They're old enough to have formed strong opinions about what they like and don't like, but they're not old enough to want to spend all their money on clothes and CDs. They can read. They're learning the relevant math skills, such as converting fractions to decimals. They can draw graphs and assemble information that helps them keep up on their investment. And they're able to compare values and choose the best one.
You'll be able to gauge when your child is ready to take the plunge, just as you probably knew when she was ready to step off the diving board into deep water. There are countless opportunities every day, no matter the age of your child, for you to shift your strategy from "it's important to save" to "it's time to invest." Don't delay because you think your child doesn't yet have the interest. Your interest will become hers.
Testing the Waters
Okay, so exactly how do you bring up investing in an interest-bearing fashion?
Our field-tested strategy, as we've mentioned, was to zero in on a child's favorite things. Start paying attention, as Lynn did with Danielle, to what your kid is crazy about in the way of products and services, whether it's French fries or lawn mower engines, Tonka trucks or Spice Girl dolls, Discovery Zone or Gymboree, Gap or Levi's. What are her favorite toys? Favorite foods? Favorite places? Favorite activities? Favorite tools or clothes or services?
We bet that she's reciting her favorite things every day, whether you're in the car on the way to soccer practice, sitting on a park bench picking gum off the bottom of her sneaker, eating popcorn in front of the television, or walking around a mall looking for jeans. Kids provide a running commentary; you just need to tune in. Maybe at afternoon snacktime your second grader mentions how much he likes Cheez-Its. Maybe while driving on a long trip your twelve-year-old insists there are more Volkswagen Beetles on the road than Honda Civics. Maybe while you're working together on a tree house your fifth grader chatters about his hammer. Count on it: Your child cares about a surprising variety of goods and services.
Show that you care about this favorite thing, too. You have your reasons, but you're interested in hearing his. You want to know why he likes it so much. Ask a question or two. Listen to his response. Don't accept a "because it's cool" answer; press him for details. Ask him if it's cool because everyone else has it. That may be all it takes to get the conversation going.
Let's say your child has cut her knee and insists on the tattoo plastic strip rather than the plain old bandage. "Just what is it about these tattoo bandages that makes them better?" you can ask. Your questions can help you gauge how strongly your child feels. A heartfelt defense of tattoo bandages, for instance, could be the opening you need to feeling out her interest in ownership. You could say, "Well, if you like these bandages so much, maybe you'd like to own part of the company that makes them."
If she fails to take the bait, say nothing more. You're in no rush. You're waiting for curiosity to compel her to ask what you mean by part ownership, and in time you'll get it. Try the same game on another day with another favorite thing. Try Lynn's approach if you're a shareholder yourself. See if that prompts an I-wanna-be-too response. ("I think Schwinn makes great bikes, too," you could say. "That's why I'm a part owner of that company. Would you like to be a part owner also?")
Let's say your child has been eating the same breakfast cereal for weeks. "Mmm, this is pretty tasty stuff," you could say while trying some. Now start her thinking with a series of questions, being patient to get her answer to each: Do you think lots of people would like it? Do you think lots of people know about it? Do you think the company that makes it will make a lot of money? Then, finally: Did you know you can own a part of that company and share in its profits?
Just as kids provide a running commentary, our experience has taught us that you can integrate investment education into everyday activities, such as:
Eating out. Talk about the restaurant. It may be operated by a publicly owned company, and kids especially enjoy the hamburgers and French fries from fast-food restaurants such as McDonald's and Wendy's.
Going to the movies. Disney makes many family-oriented movies that both children and parents enjoy, so families can have a lot of fun searching for different commercial products, such as the clothing and figurines. Remember, Disney makes money from more than just the movie itself!
Shopping for clothing. Talk about the most popular name brands that your kids and their friends are wearing and who manufactures the product, such as Gymboree for toddler clothing and Tommy Hilfiger for young teen products.
Shopping for groceries. Many grocery stores are publicly owned nowadays, such as Giant Food in the Washington, D.C., area. In addition, the manufacturers of many products are companies that trade shares of stock, including the Campbell Soup Co.
Whenever you turn on lights in your home. Talk about your utility company. Most electricity suppliers and other utility companies are traded on the New York Stock Exchange, and many utility companies are regionally based, such as the Philadelphia Electric Co. in Pennsylvania.
While attending an athletic outing. Notice the corporate sponsors' logos displayed throughout sports arenas across the country. The current trend is for athletic clothing manufacturers to pay players to wear clothing with their logos. Notice how many major corporations are paying to have facilities bear their names, such as the 3COM Stadium in California, which used to be called Candlestick Park.
If you purchase a car. The American automobile makers Ford and General Motors are public companies that have been around for a long time, but Volvo, the Swedish firm, is also a public company whose stock trades here in the United States.
While on vacation. If you stay in a hotel, find out who owns it. Don't be surprised if it is owned by a large public corporation such as Host Marriott Corporation, which owns 125 brand-name hotels throughout the United States and Canada.
Before you take a sip. Do you like Coke or Pepsi? Both are made by major corporations that trade on the New York Stock Exchange.
You get the idea. The list is endless once you start thinking about the major corporations behind the products and services you use every day. This is the first step to becoming a savvy investor, and it is fun for you and your kids. If you keep things unpressured, eventually you will get a "What did you mean when you said I could own the company?" response.
From your child's list of favorite things, the two of you can decide on one that your child is willing to support with her own money. Never mind if her own money actually comes from you as an allowance or gift, or from Grandma for Christmas, or from coins you allowed her to roll and then cash for herself. The important thing is that she feels it's her choice of company.
It's not important for you to think that her choice of companies is a potential moneymaker. What happens to the stock you buy for your child in terms of value is almost irrelevant. It's a teaching tool. Even if the cash value increase is less than stellar, it will have been a good buy.
Chances are, however, that your child's investments will be moneymakers because kids are very good stock pickers. They know what's hot without even trying. Beanie Babies or Barbie dolls, Pepsi or Coke, Tommy Hilfiger or Nike, grade-schoolers can choose the winner every time. Elementary school students can pick growing companies because they are intensely loyal to the products they use regularly. Teenagers recognize trends just by looking at what their friends are doing or wearing, long before The Wall Street Journal reports that snowboarding or Skechers shoes are hot. Peter Lynch calls this kind of investment method "the common knowledge theory"; it's just a way of applying everyday observations to the stock market.
From what we've seen, kids have enough common knowledge to rival a skycraper full of stock market gurus.
Copyright © 2000 by Pat Smith and Lynn Roney