Breaking My Own Rules To Teach My Kid

NOTE: I wrote this back in March 2021, the week that Roblox did its direct listing. A version of the post ran in the San Antonio Express-News.

To research the hottest new tech stock, Roblox, I went straight to my highly plugged-in in-house analyst: my eleven year-old daughter. She sat me down on the couch with her iPad and patiently explained to me the user-generated games, the in-app purchases, and the revenues available to both gamers and creators on this gaming platform. After that, we arranged for a $50 investment of her money1 in shares on the first day they became available, Wednesday March 10th.

Roblox
Roblox!

Roblox listed 199 millions shares on the New York Stock Exchange last week2 but did it in a most unusual way: a direct listing, rather than an IPO.

There are at least two innovative things to know about this. One is about the company and the other is about this direct issuance, which I suspect we’ll see a lot more of in the future.

Most companies that list shares on stock exchanges first do an initial public offering (an IPO). An IPO involves investment bankers preparing a “road show” and a consulted negotiation around the issuance price that all new investors will pay. A company doing an IPO typically seeks to both raise new money for the business and to allow private investors to sell some of their stakes in the business.

A direct listing, by contrast, raises no new money for the company. It merely allows privately-held stakes to be floated on an exchange – The New York Stock Exchange in the case of Roblox – to allow insiders a chance to cash out and outsiders a chance to buy in.  

Roblox didn’t need new money, in part because it secured $850 million in private financing in January of this year, solving the fundraising part of an IPO ahead of time. Roblox had already ended 2020 with close to a billion dollars on hand, further explaining why it skipped the fundraising part of an IPO. It also saw fourth quarter revenues jump 111 percent from 2019 to 2020, providing the kind of growth tech investors crave. Roblox had cash, name recognition, and buzzy growth, so the road show and fundraising parts of going public were unnecessary.

Until now, direct listings have been extremely rare. Spotify – the audio-streaming company founded in Sweden – is the highest-profile direct listing ever done previously, back in 2018. By direct listing rather than hiring a traditional Wall Street underwriter, a company can in theory save huge bucks, which typically runs between 3 and 7 percent of the money raised. A direct listing not only forgoes the support of a new issuance, it skips the marketing hype that accompanies a traditional roadshow. In the case of Spotify as well as Roblox, they didn’t need the marketing hype. Among their customers and within their own industry, they are dominant providers. And by all appearances, the shares didn’t do worse as a result of a direct listing rather than a traditional underwriting process. Roblox soared 54 percent from its initial listing price on the first day.

This direct listing method is all pretty new stuff.

The New York Stock Exchange moved in the direction of allowing more direct listings through a request to the SEC in 2019. In December 2020, the Securities and Exchange Commission approved direct listings (under certain conditions). The Roblox listing last week is the first high profile test of this way companies can reduce their Wall Street fees and, given its success, we should expect more companies going public to choose this route in the future.

adopt-me-roblox

Meanwhile, Roblox itself is innovating in other ways. For better and worse, they have mastered the art of capturing kids’ attention with their immersive-world game platform.

For the past year and a half – during COVID isolation from school and ordinary interactions with other humans – Roblox has occupied more of my daughter’s time than any other single activity, except maybe sleeping. Even the sleeping part is arguable when lined up next to Roblox time.

You may be curious, what does she do on Roblox? It’s virtual-reality games. Her favorite game, “Adopt Me,” is about adopting a pet. And then upgrading that pet into the most stylish and unique pet possible. Her latest acquisition last week, a golden unicorn via a hard-earned golden egg, was incredibly exciting, apparently. You had to be there. Other games within the virtual reality involve heists, escaping burning buildings, or avoiding a killer. Normal stuff kids are into, I guess.

The Roblox company, as a games platform, facilitates user-generated content, meaning gamers can invent their own games. For that, designers receive either virtual dollars or real dollars. In real dollar terms, over a thousand game designers have earned more than ten thousand dollars in the past year on the Roblox platform. That may not support a family, but to an eleven year old that amount of money seems incredibly enticing. 

Through the course of this column, I have described breaking at least three of Mike’s Cardinal Rules of Investing, so I briefly just want to acknowledge these and then explain my rule transgressions. 

First, I don’t recommend you buy individual stocks. For kids, however, I do think purchasing individual stocks is useful for teaching and learning purposes. Individual stocks for companies they know can get them excited about the magic of investing, capitalism, markets, and compound interest. It’s just too darn boring and abstract to explain low-cost diversified index funds to an eleven year-old, even though that is how all of us should always invest.

Second, I never write about individual stocks I own (or that my family owns) because I don’t generally own any and also I don’t want even the appearance of a conflict of interest between my writing and my family finances. So I broke that rule also today. To which, in my defense, I can only plead with you to believe that I have not sold my journalistic soul to shill and pump up my eleven year-old’s $50 stock investment. To be clear, in no way do I recommend Roblox shares for any of you. This thing is probably going to zero. Which would be a great educational outcome for her! She might cry, but I would be happy, because $50 is a very cheap lifelong lesson from Daddy on the risks of owning individual stocks! 

Finally, I always recommend against buying new listings – traditionally IPOs – for a variety of prudent reasons having to do with information disadvantages, media hype, and the greedy exuberance of insiders selling to a credulous group of outsiders. Please excuse my rule transgressions today, they were each done with an educational purpose.

Please see related post:

My review of M1 Finance

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  1. If you’re wondering how to invest just $50 in shares that each cost $65 on the first day of trading, the technical answer is the investing app known as M1 Finance, which allows for fractional ownership of shares and about which I wrote a thing here in December 2018.
  2. Again, not exactly last week, but in March 2021.

Book Review: What All Kids (And Adults) Should Know About Savings and Investing

I teach an adult course next month about teaching one’s kids about money and finance. I also engage in home-based experiments on my own guinea pigs (err, children) all the time, trying out lessons on stock investing, or compound interest. But most home-schooling requires a textbook (or e-book), so I was pleased to receive a copy of Rob Pivnick’s What All Kids (and Adults) Should Know About Savings and Investing.

Pivnick’s book boasts many virtues, not the least of which is that an adult could read the 38 pages in about an hour. (Kids, maybe two hours). The next virtue of his book – and this is no small thing – is that he covers a comprehensive range, hitting all the major points of savings, budgeting and investing for the long run. A third virtue – he’s right on so many of the important topics where the Financial Infotainment Industrial Complex is wrong, or at best, misleading.

I wrote yesterday that many parents are afraid or unable to start a conversation about money with their children, almost as if its a powerful taboo like sex. For that reason, I’m looking forward to reading Ron Lieber’s The Opposite of Spoiled, for further ideas about how to broach the subject.

But if you were looking for a single, efficient, comprehensive text with which to lay out the right ideas for your kids, you could have confidence in the right messages from Pivnick’s What All Kids Should Know About Saving and Investing. Pivnick and I have total alignment on a bunch of key topics which the Financial Infotainment Industrial Complex fails to make clear.

Pivnick’s right messages include:

I plan to write my own “Teach Your Kids About Finance” book some day, but Pivnick’s book fills the need quite nicely while you all wait, breathlessly, (I’d say maybe three more years?) for me to finally get my book written and published.

what_all_kids_should_know_about_saving_and_investing

In the meantime, any ideas for my snappy title?

Please see related posts:

Daughter’s First Stock Investment

The Allowance Experiment

Looking forward to reading Ron Lieber’s The Opposite of Spoiled

Rapunzel and Compound Interest

Book Review: Make Your Kid A Millionaire by Kevin McKinley

Book Review: The Only Investment Guide You’ll Ever Need by Andrew Tobias

 

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Daddy, I Need An Allowance

Daddy daughter shoes
Daddy, I Need An Allowance

Unintended Consequences

Parents will recognize the following as the “If You Give a Pig a Pancake” problem, referencing the ubiquitous children’s book about giving a pig the first thing (a pancake) which leads to the next thing (some syrup), which leads to the next thing (a napkin), and so on.

For those of you who have not been parents in the past twenty years and aren’t familiar with the pig-and-pancake problem, file this one under the “Department of Unintended Consequences” Tab.

Background to the problem

Readers may recall my wonderful, awful, idea a few weeks ago to introduce my eight year-old daughter to stock investing.

Fast forward a few weeks to a conversation she had with my Managing Editor (aka wife) last night.

“Mommy.  I need money.”

“Why?”

“There’s a book fair at school but Daddy took all of my money and put it in stocks.  And stocks are not fun at all.”

“I’m sorry dear.”

“Can I have an allowance?”

“Let me talk to Daddy.”

Ugh.  It is true that I took all of her money.  And converted it into shares of Kellogg stock.

And it’s also true that the steady stream of loose teeth – her main source of revenue via the Tooth Fairy – has dried up lately.  There’s just no telling when the next tooth will drop, and then the school book fair comes up.  Girls who don’t lose teeth don’t get paid.  And then she needs fairy princess dolls, then it’s just all like, bills, bills, bills for my eight year old right now.  You understand what I’m saying.

I didn’t hear about this conversation at first, but I noticed my oldest daughter kept prompting my wife to bring up some particular unnamed topic last night. 

My daughter was eager for the conversation, but my wife strongly preferred that she and I develop a common strategy with regard to allowances, without having to simultaneously negotiate with an eight year-old. 

(Here’s where I ought to insert some analogy between negotiating with 8 year-olds and negotiating with terrorists.  Or lately, negotiating with Congressmen overly responsive to hard-core constituencies, encouraged by a system gerrymandered for incumbency.  But I digress.)

Also, my wife assumed I’d have some strong ideas about what to do when it comes to kids’ finances.  You probably won’t believe this, but I have a lot of thoughts about allowances.

If you give a pig a pancake, pretty soon she'll ask for some syrup
If you give a pig a pancake, pretty soon she’ll ask for some syrup

Allowances!

So now we have moved, like the proverbial pig and his pancake, from the “first stock investment” phase to the “allowance phase” of parenthood.  At this point my wife and I haven’t fully decided what to do, although I’m about to explain to you my best ideas so far, at least for the first month of her allowance.[1]

This is one of the cleverest allowance ideas I’ve ever come across, so I thought I’d share before even rolling it out to my family.

Another Wonderful, Awful, idea.

I mentioned this other wonderful, awful, idea once before, buried at the end of a book review I wrote for the excellent The Only Investment Guide You’ll Ever Need, by Andrew Tobias.

You see, I’m always on the lookout for ways to show that compound interest is the most important and powerful math concept in the universe, and Tobias suggests the following children’s allowance plan for driving the idea home.

In fact he lists three great ways of teaching the power of compound interest to kids through the mechanism of the allowance.  Each one has its own special advantage.

Cookie Jar Experiments
Cookie Jar Experiments

The power of compound interest – The Cookie Jar Experiments

Tobias describes three versions of what he calls the Cookie Jar Experiment, which over a month or two can viscerally and intuitively teach the magic of compound interest to kids through the mechanism of an allowance. 

 Version One.  Offer your kid $1 on Day 1, and put it in a cookie jar.[2]  Offer to add 10% more each day, as ‘daily interest growth’ on that original $1. 

So, for example, on Day 2: $1.10 would be in the jar,

Day 3: $1.21.  And then on

Day 4: $1.33. 

After a month there will be a total of $17.45 in the jar, which shows how powerful 10% compounding can be, even if you begin with just $1. 

Tobias suggests you probably won’t continue the experiment to the end of Month 3 ($5,313) or Month 6 ($28 million) but really that’s up to you and your own resources. 

In my opinion, the power of compound interest as a concept is really worth teaching, so some of you will want to consider going the full 6 months.  It will only cost you $28 million in total.  If you do decide to do everything it takes to teach little Johnny the power of compound interest, be sure to email me at Bankers Anonymous so that I can provide my bank account number for the minimal 2% fee I normally charge for this kind of life-changing advice.

Anyway, back to my regularly scheduled commentary.  While ‘real life’ doesn’t let you compound at 10% on a daily basis,[3] the experiment lets you demonstrate the amazing power of compound growth to your kids in a concrete way.

The 1 month time period – by which $1 grows to $17.45 – is short enough that kids can see the growth and just how powerful it can be.

Version Two.  

This next version of the Cookie Jar Experiments is best for two kids, and it can drive home the power of compounding early, plus delayed gratification.[4]

Between your two kids, you offer a similar deal to version one, but with a twist.  If one of them is willing to skip the first three days of interest accrual, they can get something desirable like a chocolate bar.

After they finish fighting over the chocolate, you run the experiment for, say, two months.[5]  The child who went without the chocolate has $304, while the ‘lucky’ child who got the chocolate only has $228 in the cookie jar at the end of 60 days. 

The lesson: Start saving early because it’s the earliest accruing period that matters the most. 

The child with $304 can now buy a whole bunch of delicious cookies and leave the greedy chocolate eater weeping.

Are we having fun yet, kids? 

Kids?  Please stop fighting, please.  Thank you.

Version Three

“If only he’d used his powers for Good, instead of Evil.”

The final version of the cookie jar experiment allows you to compare for your kids the power of compound interest to create wealth to the power of compound interest to dig ditches of indebtedness via credit cards.

Run the same experiment as in Version One, but use the interest rate associated with many credit cards.  Let’s pick 20% because it’s a round number, even though many people’s effective credit card rates are even higher. 

Start adding money to the $1 at a 20% growth rate and label this ‘Credit Card’ growth.  On Day 19 the ‘credit card’ account has grown to $32, versus the $6 to which the original savings at 10% per day grew. 

If you run the comparison all the way to Day 35, the difference is $590 for the credit card account versus $28 for the ordinary 10% growth account.  The key to this version is pointing out that some people scrimp and save and achieve some growth on their savings, while others pay huge portions of their money to credit card companies.

Here’s a video version of this allowance experiment:

Again, of course, whether you fill up a cookie jar with $590 is up to you and your family’s means, but you can create an unforgettable demonstration for your kids of how small differences in compound interest rates make for giant differences in the medium and long run.

So what will we do about the allowance request?

So will we decide to run these experiments on our children when they request an allowance?

I’m going to push for at least Version One to kick off the new allowance phase for my eight year-old. 

She may not literally be having fun with the fact that all of her tooth fairy money is tied up in Kellogg stock right now, but I’m pretty sure it’s nothing years of therapy in her future can’t undo. 

If she complains, I’ve got a Jack Handey quote ready:

One thing kids like is to be tricked. For instance, I was going to take my little nephew to Disneyland, but instead I drove him to an old burned-out warehouse. “Oh, no,” I said. “Disneyland burned down.” He cried and cried, but I think that deep down, he thought it was a pretty good joke. I started to drive over to the real Disneyland, but it was getting pretty late.”  — Jack Handey

That’s why I say, deep down inside, she’s knows stock investing is fun.  And so are Daddy’s experiments with allowances.

Please see related posts:

Daughter’s First Stock Market Investment

The Allowance Experiment is even better than I expected

 Book Review of The Only Investment Guide You’ll Ever Need by Andrew Tobias.

 


[1] After that, we may revert to a more typical $2/week, conditional on a usually-left-undone chore – cleanup of the girls’ room – that drives my wife nearly to glue-huffing, out of frustration, on a weekly basis.

[2] Or, wherever.  Do cookie jars even exist anymore?

[3] Except, you know, if you’re a pay day lender.

[4] Also, it pits your children against one another, which is always fun.

[5] Again, adjust to your own means.  And then, of course, send me a reasonable fee if your means are extraordinarily large.

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