Excerpted from Maya Peterson’s Early Bird: The Power of Investing Young – with permission
“Invest in yourself. Your career is the engine of your wealth.” -Paul Clitheroe
“I thought you had to go to New York and yell at people to get money. I was so mad because it cost so much to fly out there,” says Isak Dai, teenage investor and quiz bowl enthusiast. Even as a 10-year-old the only barrier he felt preventing him from entering the stock market was paying for a plane ticket to get to Wall Street. If losing money crossed his mind, which it rarely did, he quickly shook it off “I am still a child so it’s not like my life is on the line.” That is another plus of starting young; you have less to lose. Because you are not investing your life savings into a variety of companies, there is not as big of a threat or chance for one to panic and sell. The gift of time allows you to bounce back and learn from mistakes.
Isak took a leap of faith in the stock market of Southeast Asia and Africa. He was intrigued by the world’s emerging markets because of “their potential to grow explosively and provide massive return on investment if you’re patient.” His interest triggered him to buy mutual funds all around the world, but he had to learn the importance of patience.
Four years after becoming a shareholder, he sold his shares of his African Mutual Fund and is watching his Southeast Asian Mutual Fund rebound from a heartbreaking drop. But Isak is far from discouraged from his losses; he continues to track emerging markets and learn from his mistakes.
“Investing in the stock market is the best way to make money because it is the most efficient way to make money outside of working and it gives you money that you can rely on. The stock market is the best way for your money to be growing, rather than sitting there in a savings account or slowly growing in a bond.” Before you start investing you need a motivation, and Isak had that, with his excitement to jump on to the next emerging market.
There is one question every investor should answer for themselves, “Why do I invest?” The first thing that popped into my mind was to make money, financial freedom. Merriam Webster defines investing, “to commit (money) in order to earn a financial return.”
Is investing just about making money? I believe it is more than that. Making money is an essential part of investing. To me, the second definition of investing “to involve or engage especially emotionally” is just as important. A large part of investing is the emotional attachment. Investors follow companies, help them grow by buying shares, and should pick them based on their values. That is a very large part of why I invest. That idea can be boiled down to four reasons.
The Investing Way
The main reason I invest is because of the lifestyle and my hopes for my future. I’m not talking about fancy caviar or a nice house in the Caribbean. The stereotypical investor is usually summed up by things like that, but my experience has shown me that the opposite is true. All of the amazing investors I have met over the years share three traits: humility, frugality and nerdiness. Investing changes your mindset and impression of money. You learn to become analytical and develop good sense of humor. Mistakes will be made, so it’s good to have a sense of humor and to learn from them.
I encourage you to seek out an investor and walk around in a mall or marketplace with them. Most professional investors are happy to answer any questions a student has. One of my favorite questions is “What is your favorite stock and why?” As an investor, the world becomes a candy shop filled with tempting companies and stores to choose from. What do you notice about the store? Are there lines out the door, overflowing parking lots, or do you notice empty parking lots and employees with too much time on their hands?
You get to think about what might be a potential investment. You start to notice about the names of the sides of the train cars, or the soap dispensers or who owns your favorite ice cream brand.
While walking into town with my father we had to decide on a restaurant we wanted to go to. We narrowed it down to two options: Chipotle or a local restaurant. Before we made our choice, we considered which one had the competitive advantage. We concluded that they couldn’t be compared to each other in that way. One is a local company, meaning residents in my area would know what it is and probably prefer it over Chipotle, but if non-locals were driving by they would most likely go to Chipotle. They both have lasted a long time across the street from each other and neither show any sign of leaving.
Investing opens your eyes to what makes a good business and investment. Looking at this everyday example, we were evaluating which one of the restaurants would be a better business. The world gives you clues and an investor is like a detective who has an endless series of mysteries to try and solve.
Making Your Money Work for You
Once you have put the time and effort into finding a good company, you can sit back and watch it grow. How simple is that?
Here’s an example: Four years ago, I bought Johnson & Johnson (JNJ). I bought Johnson & Johnson because I’m a dancer and I would use their toe tape on a daily basis.
My original investment was $300 that grew to $460. I earned the $300 from babysitting, but I decided to make it grow. So, investing has increased my earnings by 65% and I have made a total of $160.
I chose to invest for one reason: My shares of Johnson & Johnson will likely continue to grow until I sell, while I have to work more shifts if I want to make more babysitting money. My profits from babysitting were $300 but if I invest that money, depending on how long I hold the stock, my money could double or triple or more! And if you can do both, invest and work. Win-win!
Now let’s see from the original $300, how much it could grow over the next 20 years if it remains growing at the same rate. The bolded year is the current year we’re on.
From this table, you can see that after 20 years of compounding I would have almost $2,000. If you subtract the original $300 that I invested, that makes $1,605.32 in investing profit.
Put simply, once you do a little work for your money, you can make your money work for you.
How Much You Learn
With investing, you can also learn more than just how to make a customer happy (although that is a big part of business); you can learn how businesses run, learn which ones succeed and find the ones that don’t. Learning more about how businesses run can help you in the investing world, but it also helps with tricks of the trade if you want to start your own business.
When you invest, you learn how to make your money work for you. And you can learn patience which is the key to investing. Looking back at Johnson & Johnson I made $160 over four years, which boils down to $40 each year, but that money can go from that original investment of $300 and grow up to numbers much higher.
Like I said, I started off investing in Johnson & Johnson because I’m a dancer. They sell medical tape that many dancers use. I went through about one roll a week, meaning over 52 weeks at a cost of $3.99, they made $207.48 from one customer and one product by the end of the year. That sounded amazing to me, so I decided to invest. Now I know that investing in Johnson & Johnson is a great investment for many more reasons than just their toe tape margins.
For one thing, they are one of two American companies with AAA credit ratings (the other company is Microsoft). AAA credit rating is the accountability of the company with paying back debt and managing their money. Only 15 states have a AAA credit rating. Even our own U.S. government has a AA+ credit rating. This shows how safe and responsible Johnson & Johnson is with their money. Because investing deals with money, and we all know how precious money is, it is best to find companies with good credit ratings. They provide a blanket of comfort around your holdings and money. You can easily find a company’s credit rating by looking it up on Google.
Connecting Stories and Numbers
Investing ties two of my two favorite things together; stories and number. Successful investors successfully connect the dots between the stories and numbers of a company. For me, this is the part that is the most fun. If you look at a company’s numbers and see their debt is increasing, as the investor it’s up to you to know why that is. Maybe it’s because they have a new building being built, or they’re changing headquarters, or maybe it’s because they are buying another company. Connecting the dots between the numbers and the story is what makes investors comfortable and confident in their holdings, so when they see that debt go up or the Price to Earnings Ratio go up, they do the research to know the reasons. It makes for less risky, more understandable investments.
Investing has changed me as a person and consumer. It’s not for everyone, but I’m proud being the nerd I am. There are so many reasons to start and continue investing. And as Aunt Ginny (who you’ll meet in a later chapter) says, “It’s much better than slaving in a hamburger place.”
What is your story? Why do you invest?
Article by Maya Peterson - more on the book here