investing advice for college age kid

[villainx]

A nephew recently sought my advice on how to start investing with a bit of lump sum cash, around 7K.

 

I tried to give some general as well as specific beginner advice, from building age appropriate portfolio (able to take a little more risk), which brokerage to use (I suggested Schwab, but any discount online broker will do), importance of thinking long term (duh!), importance of investing in familiar things, some reading material, and how to start evaluating opportunity (what is P/E, past performance isn't important, and so forth). 

 

As you can expect, it's difficult for younger folks to think long term especially when he or she can pull up charts showing rapid 30% gains.  And he (that's my nephew) was naturally drawn to out of favored penny stocks (groupon!), option trading, and speculative big names (amazon, walgreen, and so forth).  Which was followed by warnings that investing don't work like the way he imagines.  At the same time, what do I know, I only modestly (sometimes out)perform.

 

Anyway, I told him to just go for it and the best way to learn is to have some skin in the game.  Might be bad advice, I know. But I re-stressed that the core of his investments should be solid companies/indexes, and he can play around in the margins.  I assume taking some lumps is better than taking big lumps. 

 

At the same time, I also looked at the companies he was interested in, and just figured out a sort of model portfolio.  Namely, look at solid companies with quality managers: Amazon, Facebook, Berkshire, Disney, Brookfield, and Nike. (at that time, they were at a price level that I felt justified taking a fair position in, not cheap, but not expensive) Use that portfolio as a guide, or SPY, or use that to compare with whatever portfolio he comes up with.  In some ways, if I had to go back in time, I might have opted for a moderately concentrated portfolio of quality companies at reasonable prices.  (I am still too speculative, or outsmart myself with investing rationales.)

 

He eventually replied with his portfolio and asked what I thought.  I didn't think it was great, but it wasn't lethal.  More than half were in big solid names (index emulating mutual fund, Google, BAC, DIS), and there were a bunch of small (I would consider meaningless, but I understand it wouldn't be for an impressionable youth) penny stock bets (like Groupon and Dryship).  So to the extent that his overall investment wouldn't get obliterated, and he had time to learn, I said it was acceptable. I do worry that extreme success or failure at the penny stock margins would lead to bad habits though.  And followed up now and then with how the model portfolio has performed (in the short run, it's been great, but that's less than 6 months).

 

Just wondering how folks here think I did, or how I should have done better/differently.  Naturally, I want him to do well, but I also want to foster his own education.

 

 

[DTEJD1997]

I think the most important thing is that he get started, and that he starts learning.

 

$7k, while a nice chunk of change, is not a life altering amount either way...what is life altering is learning what works & what does not.

 

I know guys in their 30's that either WON'T invest a penny, OR some guys that are just screwing around with insignificant amounts because they are too afraid to make a mistake.

 

I also know guys in their 40's & 50's that won't invest, they want to "learn" how to make 50%+ a year, and returns of 10% or 15% just aren't worth fiddling around with...

 

I have a suspicion the above mentioned associates will NEVER really get investing.

 

So I think it is great your nephew is getting started on the investing path.  I wish him good returns!

 

I think your advice to him is pretty decent.

[villainx]

Thanks.  Aside from Buffett's Rule 1 and 2, I just want to give him the appropriate encouragement. 

 

The advice giving also led to sharper reassessment of my own approach.

[zarley]

I would have him start here:  http://www.barnesandnoble.com/p/little-book-of-common-sense-investing-john-c-bogle/1008247261/2676378650710?st=PLA&sid=BNB_DRS_Marketplace+Shopping+Books_00000000&2sid=Google_&sourceId=PLGoP1852&k_clickid=3x1852

 

And then encourage him to live frugally -- if he's spending less than he's earning and learns he can live without extraneous stuff, then he'll be likely to have good financial outcomes over the long run. 

 

From there, it's a lifelong exercise in learning about businesses and how markets go wrong.

[SharperDingaan]

When the amounts are this low, nephews are often better served through harsh life lessons;

2 approaches.

 

It is not enough.

Go travel, or buy some better tech & clothes; come back & talk to me when you have some real money.

You will come across as an arrogant prick - but you will have driven home 3 lessons. 1) The here & now may be better than the future (women invest in appearance, not mutual funds - for a reason). 2) Stick out, & learn how to deal with peer group envy/pressure - because there will a lot of it (if they do well). 3) Use rejection as a motivational tool - S***!, I will ram it down that a*******s throat! (works better with males)

 

Set them up for a near wipe-out, & make them wear the loss for a year or so.

Learn how hard it is make back a loss, by having to work 2 or 3 jobs, and you will be a lot more humble - & a lot less inclined to be cocky in your investment decisions; Risk Management 101. When they have earned back their loss; round up to the nearest 10K, sponsor an account for them, GIVE them the seed stake, and use it to teach them the dark arts of investing. Everybody has to EARN their spots.

 

You will not be popular, but the nephews will be thanking you once they reach their mid-late 20s.

 

SD 

 

 

[villainx]

Zarley,

 

I always suggest index funds either in whole or as an anchor, and Bogle's book is among the book recommendation, but I also want to make sure I get through to him and give him the advice he is seeking.  Index investing isn't what he's looking for, and I don't want to alienate. 

 

[villainx]

When the amounts are this low, nephews are often better served through harsh life lessons; 2 approaches.

 

Haha, I mentioned option 1 when he first raised the point.  Though it was more of just spend it on things and experience.  It'll certainly be more valuable in the long run. 

 

As for option 2, I expect the plays in the penny stocks or other short sighted ideas will lead to obliteration.  Or if anything, prolong overall underperformance would lead to re-evaluation.  I have no idea, maybe he is some penny stock/market timing genius.  But I hope the lessons of option 2 can be gained without complete obliteration.  I rather partially seed stake than give a complete seeding.

 

I should add that I - if not most folks - was in the same boat.  I came of age during the dot com bust, so I had my obliteration.  It was those couple of stocks that remained in my portfolio that I just abandoned in disgust with investing that led me back in.  After several years, I opened my brokerage statement, and by doing nothing during the intervening years, the stocks I still held recovered and had some gain.  That light finally came on.  Of course, that was right before the financial collapse.  Thankfully I learned my lesson well enough (or more likely got extremely lucky) to survive that.

[Guest longinvestor]

Smckids.com

 

Secret millionaires club, starring Warren Buffett and some teenagers. Wish I had come across this when I was younger. I can see this appearing corny especially given that no one else doles out such advice!

[StockDuck13]

As a current college student myself, the fact that he wants to learn about investing at all is a minor miracle. I know very few guys here who have even the slightest interest in investing (most of them are business majors). Those that do will have the drive to learn about investing on their own. Everything I know about investing I learned on my own time, outside of the classroom. I believe that if you want to get really good at something, you have to be willing to improve that skill on your own time. Just taking classes won't do it.

 

DTEJD1997 is right, the amount isn't going to substantially effect his life one way or the other, it's all about the learning right now. I invested far less when I started and made plenty of mistakes, which I'll be sure to never make again.

 

One of the first books I read that really got me hooked on investing was The Snowball. I loved reading about Buffett's life and career because it was a story, not just a list of rules and principles. If he likes reading (I'm assuming he does), try to find him a book like The Snowball that will get him interested and eager to learn more on his own.

[villainx]

One of the first books I read that really got me hooked on investing was The Snowball.

 

I suggested these two as the starter, with a bunch of more of it sticks.

 

One Up on Wall Street, Lynch

Making of an American Capitalist, Lowenstein

 

Seems as good as any. 

 

[StockDuck13]

One of the first books I read that really got me hooked on investing was The Snowball.

 

I suggested these two as the starter, with a bunch of more of it sticks.

 

One Up on Wall Street, Lynch

Making of an American Capitalist, Lowenstein

 

Seems as good as any. 

 

 

Those are both good, in fact Lowenstein's book might be better for him to start since it's shorter and therefore less intimidating. I also really enjoyed reading Michael Lewis's books too, but those aren't as specific to your goal here.

[SharperDingaan]

'I should add that I - if not most folks - was in the same boat.  I came of age during the dot com bust, so I had my obliteration.'

 

I started out as an African bootlegger, before having to leave behind a thriving business & fleeing the country at just before 18 to avoid the draft. I thoroughly enjoyed myself; but it took 4 years to 're-orientate', & get comfortable with doing things 'above the table'. Such a drag!

 

SD

 

[Williams406]

406's Things to Do Before I Die:

 

16. Join an online forum where a former African bootlegger also posts.

 

Now on to:

 

17. Own a home mortgage free in London.

[Jurgis]

406's Things to Do Before I Die:

 

16. Join an online forum where a former African bootlegger also posts.

 

Now on to:

 

17. Own a home mortgage free in London.

 

To solve 17, take advice from 16.  8)

 

 

18. Lose at least 100K by following advice from strangers online.

[wachtwoord]

'I should add that I - if not most folks - was in the same boat.  I came of age during the dot com bust, so I had my obliteration.'

 

I started out as an African bootlegger, before having to leave behind a thriving business & fleeing the country at just before 18 to avoid the draft. I thoroughly enjoyed myself; but it took 4 years to 're-orientate', & get comfortable with doing things 'above the table'. Such a drag!

 

SD

 

 

I think it's time for a AMA (ask me anything) topic for you. I think you have some interesting stories to tell :)

[SharperDingaan]

It's not much different from every other immigrant story.

Lots of adventure as a youth, pushing all the buttons; finding a new place to live, & then 30 years of very boring life. Coming up on the runway to retirement, & making a few preparatory career changes so as to have something to 'do' in retirement.

 

Craft breweries & distilleries, a couple of blockchain start-ups, and hopefully a hotel/brothel at some point; all on the list.

Life is short, & boring sucks.

 

SD   

[AzCactus]

I was a college age kid not too long ago (maybe 7 years) and it really depends on the kid.  If you are asking strictly for investing advice it would probably be for them to open up a roth (if they had earned income) and buy some stocks that they believe in based on research.  By them picking the stocks on their own it will be a valuable lesson if they lose money and still somewhat valuable if they make money.    But if the kid is outgoing, adventurous etc. I think a trip may give them a much higher ROM-return on memories.  Once they graduate and are working full time taking a three week vacation becomes  a little challenging. 

[StockDuck13]

I was a college age kid not too long ago (maybe 7 years) and it really depends on the kid.  If you are asking strictly for investing advice it would probably be for them to open up a roth (if they had earned income) and buy some stocks that they believe in based on research.  By them picking the stocks on their own it will be a valuable lesson if they lose money and still somewhat valuable if they make money.    But if the kid is outgoing, adventurous etc. I think a trip may give them a much higher ROM-return on memories.  Once they graduate and are working full time taking a three week vacation becomes  a little challenging. 

 

There's a neat trip idea on May 6th if he's interested.  ;D

[matthylland]

I started investing in 2007 at age 19. My first couple thousand was used to buy a few stocks and a mutual fund. Then as the market crashed i sold, bought puts and bought double inverse ETFs toward to bottom, then bought ford at $2.12 per share and was extatic to be able to make a great "trade" by selling it for $3 just a couple weeks later. I'm pretty sure I turned $2,500 into $800 in less than a year. I cringe thinking about how much I lost on those stupid trades....but all that said, it was the best investing lessons in the world that I'm not sure I could have learned by listening to an uncle tell me to invest differently or by reading a book.

 

Would I have been better off today by not doing anything with my money? Probably, but I honestly think that $2,000 lesson taught me a lesson that I would have otherwise learned with tens or hundreds of thousands of dollars later in life during the next correction.

 

I'd say let him have control over at least a chunk of the account. What is the worst thing could happen?

[villainx]

matt,

 

for sure, my nephew does whatever he wants with his money, it's his own cash anyway.  i'm just giving warnings, tweaks, and  encouragement.  some folks just expect miracles when they start investing, mainly because they just saw the market or stock go up 30%+. 

 

thanks for sharing your experience!  can you describe what you evolved too?  or how things have gone/changed? 

 

 

[matthylland]

matt,

 

for sure, my nephew does whatever he wants with his money, it's his own cash anyway.  i'm just giving warnings, tweaks, and  encouragement.  some folks just expect miracles when they start investing, mainly because they just saw the market or stock go up 30%+. 

 

thanks for sharing your experience!  can you describe what you evolved too?  or how things have gone/changed?

 

Thanks Viillainx, I certainly agree about people expecting miracles. I know your advice will certainly help him.

 

I don't think I have that exciting of a story. "Investing" is not my day job, My portfolio now of about $150k is split almost 50/50 between funds (within the TSP) and individual stocks in ROTH IRA. But I make almost no trades now. 0 in 2016, 1 so far in 2017...funny since I used to watch 5minute charts and buy and sell options intra day, haha!

 

I started reading a lot of Wall Street history....I think that helped me understand what the "normal" is. Stocks go up and down, things happen, and that's ok. I think learning that history desensitized me somewhat from the everyday ups and downs.

 

I was just really hoping to convey the message that I think my lesson of losing a couple thousand doing incredibly dumb things early on (hoping for miracles!) is probably (hopefully) the reason I will not make those mistakes with 100x that amount. No amount of talks or reading could have replicated those emotions of losing a lot of your money (as small as it may be at the time).

 

Maybe it's like learning to ride a bike. You could sit your nephew down in a chair and talk to him for hours about safety, how to pedal, etc. or he could just go out and try, guaranteed to crash at first, but at least he'll crash now before he is grown up, weighs 200 pounds and is going 30 mph down a hill.

 

All that said, maybe if I had a good mentor like you growing up I could have combined the lessons of failure with at least 1 or 2 smart decisions and also come out a little ahead money wise. I didn't mean to convey that I think your warnings, tweaks and encouragement is bad by any means.