As a father of two daughters, I know I’ll never forget certain special times: their birth, Day 1 of Kindergarten, baby’s first piano recital, menacing the punk who is picking her up to go to the prom, and the police report I’ll file when she quits college to run off with the lead singer of that Norse Death Metal Band.
As an ex-banker with a daughter, however, other unforgettable milestones also stand out. Like, for example, when the eldest first beats me at Monopoly, when she makes her first stock market investment, and when she learns how to program Excel to calculate discounted cash-flows.
Dear readers, that stock market investment moment has arrived, so I thought I would bring you along with us on this beautiful father-daughter bonding journey. Grab your spreadsheets, and your handkerchiefs.
My daughter’s life savings
First, a confession: I am clearly a mean Daddy.
Until last week, my oldest had $370 in her bank account, the sum total of eight years of hoarding cash gifts from Aunts, Uncles, Grandparents, Santa Claus and the Tooth Fairy. In addition to the savings account, she also boasted $31 in cash that she scored at my Sunday evening poker game with the neighborhood dads.
A few months ago I realized – here’s the mean Daddy part – that if she had a total of $500, I could take her hoard and buy some public shares in a custodial account. In that way I could simultaneously:
1. Remove her liquidity/temptation to buy Bratz Dolls (or something equally horrible)
2. Teach her valuable lessons in long-term investing, delayed gratification, and math.
Now, buying shares in public companies ranks #748 in the priority list for what eight year-old girls want to do with their life savings, but again, I am a mean Daddy and that’s the kind of cruelty I subject my daughters to. I’m an ex-banker, what did you expect?
The manipulation begins
I started in on the project a few weeks back.
“Do you know you have about $400 saved up? And do you know what would be fun to do with your money?”
“We could pick a stock to buy and then track it in the newspaper, or even online!” I said cheerfully. Perhaps a bit too brightly.
“Okay…” she looks at me, with a healthy dose of mistrust. (I’m so proud of her.)
“So do you want to do that?” Picture me, with a hopeful face.
A few weeks later
I have an awful idea. A wonderful, awful idea.
On a Friday afternoon, after school.
“Do you remember that plan I had for investing in a stock with your savings?”
“Let’s work on that today.”
I explain to her my plan, which is to walk around the kitchen, living room, and her bedroom, picking all the things that are made by big companies. And then from there I’ll have her pick which one would be the coolest company to invest in.
And also, I mumble to her in that fast voice explaining terms and conditions in the final 5 seconds of every car commercial or Levitra advertisement, we’ll need to pick a stock that we can invest in directly through the company, with an automatic dividend reinvestment plan, without having to go through a brokerage company.
Then I told her if we did my stock investing plan with her $401 in life savings, I would kick in an extra $100, so she could have $500 total to invest in a company. She’s no Warren Buffett (yet) but I think she quickly understand the good deal I was offering.
And I knew that she needed at least $500 to invest in a company the way I preferred, which again was to pick a stock that we can invest directly in through the company, with an automatic dividend reinvestment plan, without having to go through a brokerage company
What we did
That afternoon, we spent 30 minutes with a pen and notebook, walking around the kitchen, living room, and her bedroom. We picked up objects and looked for the names of the companies that produced them.
Here’s what we wrote down:
*Johnson & Johnson – Lotion
*Macys – Couch
*Campbell’s Soup – Can of soup
*Colgate Palmolive – Soap
*Kellogg’s – Cereal
Maytag – Stove
Lakeshore – Wooden toys
*Sony – Stereo
Kenmore – Microwave
Viewsonic – Computer monitor
*Black & Decker – Coffee maker
*Apple – Computer
Bic – Lighter
Bayer – Vitamins
*Hewlett Packard – Printer
*Hasbro – toys
*CVS – Medicine
Morton’s – Salt
Kitchen Aid – Stove
Emerson – Clock radio
Sunbeam Products – Coffee grinder
Lands End – Lunchbox
*Target – Bag
Penguin Publishing – Cookbook
Biersdorf – Aquaphor
Milton-Bradley – Games
*Kimberly Clark – Kleenex
Pampers – Diapers
*Starbucks – Daddy’s coffee
Next, we opened up the Wall Street Journal to the 1,000 largest stocks page, and whittled our list of companies to only those which appeared on this list – a smaller group – which I have identified above with an asterisk before the name.
I prefer her first stock investment to be made with a large, widely-followed company.
Finally, I asked her to choose among the large, public companies which five she felt most kindly toward, or which she thought made great products.
Her list was as follows:
Kellogg’s (Rice Krispies are loud loud loud!)
Apple (Mommy has an iPad and she is nice!)
Target (Fun shopping trips with Mommy!)
Starbucks (Daddy is an addict and clearly has a problem!)
Campbell’s Soup (Big Warhol fan!)
The final choice – DRIPs
The final choice of which company would get my daughter’s $500 came down to the very particular criteria imposed by Dad.
I wanted to teach my daughter a few key pieces of information about stock investing that I did not learn until relatively late in life. Namely:
1. You don’t have to invest through a brokerage company, but instead you can invest directly with many public companies, bypassing a layer of investment costs. If you are a buy-and-hold investor, this can save you money in fees over time without any inconvenience when it comes to trading – since you won’t be trading much.
2. You can set up a plan with companies to have any dividends directly reinvested in their stock. Traditionally these plans are known as DRIPs (Dividend Reinvestment Plans), and they allow investors to automatically purchase more shares – including fractional shares – with dividends. This is ideal for a kid with a 10-year (at least) investment time horizon, and who will not need to use dividends to cover her cost of living. DRIPs reduce reinvestment risk, and they remove the temptation to spend investment income. In sum, they are awesome for my purposes with my 8 year-old daughter, and they are probably awesome for many adult buy-and-hold investors as well
So, I took the list of 5 preferred companies and looked up on line to see which ones offered DRIPs.
Our search among the 5 preferred companies
It turns out Apple is the least DRIPpy, as their investor relations page says it’s not possible to buy shares directly from the company. That’s fine, and seems like a perfectly reasonable position for the most valuable stock in the world.
Starbucks, Target, and Campbell’s Soup all offer a version of direct purchases from the company plus dividend reinvestment – in fact all via the same company – called Computer Share, which manages DRIPs programs for a number of companies.
I didn’t love the user interface for Computer Share, and each company specifies different terms: different minimum amounts, different costs to purchase, different costs to sell, and different reinvestment programs.
In my search for simplicity for my daughter, this wasn’t it, although I’m sure it’s a fine solution for many folks.
That left Kellogg’s, which helpfully does have a simple direct investment program with reinvestment of dividends.
The Nitty Gritty Details
My daughter, admittedly, lost a bit of interest as I surfed the Interwebs reading about different programs for direct stock purchases. After looking over my shoulder for about 3 minutes, she disappeared for the next 30 minutes. She was either playing with her American Girl doll or playing Norse Death Metal Groupie. I’m not sure which. Daddy was busy.
“Aha! I found it! Kellogg’s allows us to invest directly and have automatic reinvestment of dividends, and they have a $500 minimum. So we’re good. So is Kellogg’s ok?”
“Um, ok Daddy, if you say so.”
“See? Isn’t this exciting? I’m excited.”
With her blessing I then took ten minutes online to open up the Custodian Account for a Minor, which involved my social security number, and inputting the bank account from which $500 would be drawn.
With that task completed, I returned to telling her a few things about investing in Kellogg’s stock.
First lessons in stock ownership
We looked briefly at the Google Finance page for the company, and I showed her how the price changes over time.
I showed her on that page also that every quarter owners of the stock receive money in the form of dividends. Her dividends would buy more shares over time.
I told her that the total investment value of a company is the number of shares multiplied by the price of shares. I showed her in a spreadsheet how $500 would buy about 8 shares, with the stock price around $60/share.
I told her that her $500 could lose value, but that more often than not, in the long run, it will increase in value.
What I’m not trying to do with this investment
I’m excited about this project – admittedly about 8 times more excited than my daughter – but still this was a wonderful, awful, idea of mine.
But I know that my idea does not teach everything my daughter should know about stock investments.
We had nearly zero discussion about the relative money-making prospects of her first stock purchase. We barely talked about the attractiveness of Kellogg versus other companies – other than the fact that Rice Krispies are a very loud cereal (a big plus in the 8-year-old world) and other companies do not make Rice Krispies. Ultimately, greed can be an important motivator for stock investing, but I decided to downplay that for now.
I’ve told my daughter nothing about value investing vs. growth investing.
I’ve told her nothing about modeling future cash flows to identify the value underpinning her business ownership.
We know nothing about the management of Kellogg’s – for all I know Dennis Rodman is the new Chairman of the Board.
We didn’t read the latest annual report (although I downloaded it).
I have not exhaustively read the business news on Kellogg’s to help identify with her the known risks and opportunities of the company.
I’ve told my daughter nothing about properly diversifying a stock portfolio. I realize we’ve concentrated 100% of her equity portfolio in a single company, something I would never advocate for an adult.
I’ve shown her, but de-emphasized, the importance of the historical price chart for the company, because it’s frankly not as useful as it appears.
What I am trying to do with this investment
Despite not covering everything, I feel good about four lessons which I have started to teach my daughter.
1. Our relationship to big business and the economy – We buy and use things, every day, made by big public companies. Those companies aren’t monsters. And they’re not the boss of us. If we have savings, we can be the boss of them.
2. Math helps in the real world – Multiplication (a key 8 year-old skill to master) has a practical use in the real world, as do spreadsheets. The total market value of her investment at any time can be calculated by multiplying the share price by the number of shares she owns.
3. Investing money over time is possible, and important.
We can pick which investments to make from a wide variety of choices. It’s possible – although of course not guaranteed – that we can grow money through stock ownership, both when the companies pay dividends as well as when the share price goes up. In the long run, a variety of stock investments could make her money grow. In the short run, and in plenty of cases, she could lose money.
4. When possible, try for as little startup cost as possible
She can start investing her savings in public shares for as little as $500.
She does not need a brokerage company in order to invest in companies, but rather can invest in the companies directly, for about $15 in total cost.
She can set up a system to have regular dividends reinvested in those companies.
For now, that’s enough.
By the time she decides to sell – maybe that will be age 18 when she goes to college and needs spending money, or maybe age 19 when we enroll her in the convent to avoid the Norse Death Metal Singer – I expect we will have covered a few more investment lessons.
Disclosure statement: Other than the $500 Kellogg’s investment described here I have no direct investments in any of these companies mentioned, nor in any death metal bands, Norse or otherwise.
Please see related posts:
 Note: These last two are still in the distant future. My oldest daughter is only eight, thank the Good Lord.
 Note: That hasn’t happened yet either, because again, she’s eight. But I get weepy just thinking about what joy that milestone will bring to our family.
 Long story, short: She had a few premium hole cards early and a couple of good flops. Admittedly, also there was a little bit of crying when the pressure mounted.
 Yes, Daddy is a super-duper dinosaur. I read the Wall Street Journal, print version, every day. In this case though, I think the print version helped because we could physically hunt the page with our magic marker for the names of companies we’d found around the house. So, if your investment strategy involves a magic marker, I recommend a long-standing commitment to print journalism.
 Traditionally a bigger risk for bonds – the idea that you can’t invest your investment income at the same expected return as your initial investment – but still an issue for dividend stocks.
 She’s a Harry Potter fan, so she could relate to this description of her money.
 But listen, kid, don’t get any ideas about being the boss of Daddy, because only Daddy is the boss of Daddy. Doubts about this point are already a looming problem in the household.
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