Friday, May 15, 2015

Shoes and Stocks: A Neat Opportunity to Teach My Kids About Investing

By Keenan Mann

My kids both  like basketball and basketball shoes.  More specifically, they like Nike basketball shoes.  When I was their age I was the same way.  I'm actually that way now.

I can vividly recall buying my first pair in the spring of my senior year in high school with money I'd earned bagging groceries on the weekends for tips.  The shoes, which cost me $100, were white leather high tops trimmed in blue and black.  They were called Revolutions.  Nike even had a big ad campaign  in which those shoes made a cameo appearance (see the 29 second mark in the video below for my shoes and enjoy a few seconds of the Beatles classic Revolution while you're at it).  I loved those shoes and wore them every day.  They were my school shoes and may play shoes.  But after about a year, they were only fit to cut grass in.  They weren't completely worthless, but they were close and getting closer with each yard work session.

I told my kids that story recently after they both asked if they could buy two pairs of shoes with money they had saved up from birthdays, Christmas, and allowance payments.  The shoes they're interested in are the signature offerings of the Michael Jordan, Lebron James, and Kobe Bryant collections.  As such, the total cost of two pairs would be somewhere around $500.

I should take a moment to explain why they asked for permission to spend their own money.  It was the result of my own crude little adaptation of the marshmallow test.  The essence of the test was captured is one of Bob's posts from a few years ago.  I've included it below in case anyone needs a refresher:

from an Arthur C Brooks writing in
"....There is a tremendous amount of research on the links among success, character and the ability to sacrifice. It all reaches the same conclusion: People who cannot defer current gratification tend to fail, and sacrifice itself is part of entrepreneurial success.

In one famous study from 1972, Stanford psychologist Walter Mischel concocted an ingenious experiment involving young children and a bag of marshmallows. He put a marshmallow on the table and told each child that if he (or she) could wait 15 minutes to eat it, he would get a second one as a reward.

About two-thirds of the kids failed the experiment. Some gave in immediately and gobbled up the marshmallow; videotape shows others in agony, trying to discipline themselves—some even banging their little heads on the table.

But the most interesting results from that study came years later. Researchers followed up on the children to see how their lives were turning out. The kids who didn't take the marshmallow had average SAT scores 210 points higher than the kids who ate it immediately. They were less likely to drop out of college, made far more money, were less likely to go to jail, and suffered from fewer drug and alcohol problems.

But the evidence goes beyond a finding that people who can defer gratification tend to turn out well in general."

So as a part of my Marshmallow test design, I put in a rule that said if they spent any of their savings, they would forfeit their monthly allowance for 6 months.  They would also forfeit any allowance matching funds, which could get as high as 50%.  I explained that purchasing a pair of shoes with those regulations in place could easily cost them 2 or three times the purchase price. That severe yet simple-to-grasp financial penalty has so far been enough to stave off their need for instant gratification.

In addition to being central to my experiment, the rules were also an attempt to introduce the idea of investing to them in a simple way.  When I was their age, I didn't know what investing was, and I didn't know what compound interest was, and I didn't know what a retirement account was and, sadly, I didn't know anybody who did.

If I had, I might have had a Nike revelation instead of a pair of Nike Revolutions.  Here's how the logic leading to my revelation might have unfolded:

At the time I bought my Revolutions, Nike's stock price was around $25/share.  Had I bought 4 shares of stock in 1988 instead of 2 shoes and held that stock until Tuesday of this week, when the price closed at $102.62 (after six 2 for 1 splits between '88 and '15), I would have around $13,300 to show for my original purchase instead of, well nothing. The compound annual growth rate (CAGR) of Nike over that period of time was around 19.7%.

I shared all this with my kids.  Of course there are lots of details yet to be grasped, but they understood the essence.  To hammer the point home though, I told them that if they each took their hypothetical $500 and bought Nike stock with it today and held on to it for 27 years and we assumed the same CAGR, their $500 would be worth somewhere around $65,000 (thanks to the magical rule of 72). They both laughed in amazement.

Then my daughter said, "But I don't wan't to spend all my money on stock."  To which I replied, "you wouldn't be spending it, you'd be investing it and it would always be there, available to you and growing, unless Nike went out of business.  To which she flatly replied, "Nike is not going out of business."  I smiled and said, "now you're getting it."

Be on the look out for updates to this story, it's going to be fun observing and writing about it, assuming they don't opt for the marshmallows.


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