How To Train Your Children To Become Smart Investors Of The Future

A young boy, while still in high school, earned by selling newspapers door-to-door. He also sold golf balls, stamps, chewing gum, Coca-Cola bottles, magazines and so on. Then, during his high school sophomore year, he purchased a second-hand pinball machine, which he placed in the local barber shop. This venture became profitable and within months, he had placed several such machines at different barber shops. Later, he sold his pinball machine business for $1,200.

This young boy became interested in the stock markets and started investing his savings from his different business ventures during his school days. He would sit at his father’s brokerage office and read stock market reports. He visited the New York Stock Exchange at the age of ten. At the age of 11, he purchased three shares of Cities Service Preferred for himself, and three for his sister. By the time he finished college, he had accumulated $9,800 in savings. This young boy is none other than one of the world’s greatest investment gurus, Warren Buffett.

Most 8-to-18-year-olds have a large number of ‘wants,’ which parents struggle to fulfill. ‘Wants’ include toys, holidays and gadgets such as smart phones. Why not teach your children to fulfil their ‘wants’ on their own, just like Warren Buffett? Here are simple ways that will help your child learn about money: saving and investing.

Avoid ‘pocket’ money; encourage ‘earned’ money: Make your children do odd jobs such as buying groceries, visiting the bank to update your passbook and doing household chores, for which you could compensate them. Encourage them to save their ‘earnings’ and not give in to immediate gratification. Get it across to them that accumulating savings could give them a higher budget for their ‘wants.’

Saving and Investing: Teach them the importance of saving/deferring expenses and investing. Focus on teaching them about investing in equity, which has the potential to help your children grow their savings exponentially over the long term. Explain to them the concepts of inflation and compounding. You could use simple examples to explain these concepts.

Inflation implies the rising costs of goods and services over time; every rupee will get you fewer things with each passing year. To avoid the impact of inflation on your wealth, it’s important that your investments earn returns greater than the rate of inflation.

Compounding implies reinvesting your investment returns which, in turn, will earn returns; for instance, dividends received on your equity investments should be reinvested to earn returns.

Get them to create an excel sheet with computations of the amount of money they can accumulate simply by deferring expenses and investing in equity for the long term. The simplest way for your children to start their investment journey is to purchase stocks of companies whose products ‘they see and use.’ Peter Lynch, one of the most famous investment gurus had propagated the concept of ‘Buy what you see.’ For instance, invest in stocks of the toothpaste you use, the food you consume, the shoes you wear, etc.

About equity investing: Start with the basics – explain about the stock market, how companies make money, their business models, products & services, why equity shares are issued, the process of investing, risk and returns, staying invested for the long term etc. When you invest in a company’s equity shares, you become a co-owner of the company; simplistically, if the company makes profits, you receive dividends and the company’s shares rise in value on the stock markets. If the company incurs losses, you don’t receive dividends and the company’s shares lose value on the stock exchange.

Once your children are comfortable with these, get them to spend a little time periodically (say, once a week for 30 minutes) to read up on the markets, news about corporates and other factors impacting the stock markets. Make this a habit. Then take the next step – get your children to open a broking account, demat account and bank account, and purchase a few shares from their savings. A demat account works like a bank account. The difference is that in a bank account, you deposit your cash while a demat account holds your equity shares. It’s easy to open a demat account. Approach your nearest stock broker to open a demat account and submit the necessary documents (identity proof, address proof, etc.)

Make your children track their investments periodically and help them further their knowledge on investing. Monitoring investments will require your children to read business publications to update themselves about new developments at the global, national, sectorial and company level. They will need to study and understand the quarterly results of stocks purchased and read brokerage reports.

Teaching your children about investing will take them a long way in becoming financially secure and fulfilling their financial goals.