How My 7-Year-Old Beat the Stock Market!

January 13, 2012

I don’t pretend to know much about the public markets, so when my seven-year-old son asked me about “the stock market” this past summer, I did what I always do – I turned to Google.  I pulled up Google Finance and we started plugging away.

I asked, “what companies are you interested in investing in?”  After weeding out LEGO (privately held) and BeyBlades (a toy that he and all of his buddies are obsessed with), we started to see some legitimate companies popping up.  Always relying on his iPod Touch to get him through our long car rides to visit family in Connecticut, Apple was his first choice.  He wasn’t thinking about the fact that Apple grew from $65B to $108B in FY2011 or the fact that they have ~$80B of cash on hand – he just likes the way he is able to play Angry Birds or Cut-the-Rope on his iPod anywhere he goes.

I told him we’d set up a pretend trading account on Google and that he could “invest” $3,000 of play money in any companies he wanted.  He started with AAPL and then added GOOG to round out the high-tech portion of his portfolio.  He then went in a direction that I didn’t anticipate – General Motors and Harley-Davidson.  When I asked why, he simply said, “Dad, cars and motorcycles are cool.”  Enough said.  He then rounded out his portfolio by adding McDonald’s, NIKE, and TJX.  We made his allocations and we haven’t looked at the portfolio since.

That was until last night when he said, “Dad, can we check to see how my money is doing?”  I was expecting a bloodbath.  After all, we didn’t look at any data – growth, P/E Multiples, beta surely didn’t find their way into our conversation.  In any case, here are the results we found:

 

 

 

I was shocked and he was ecstatic.  Not only did he do quite well, he absolutely crushed the indices over that 6+ month time period!  Let’s go back to his rationale behind his portfolio – buying NIKE because he LIVES in NIKE shorts and buying TJX because they are the cheapest place to buy NIKE shorts.  He ended up picking all really good winners except for one (GM) – pretty amazing!  It truly goes to show you that there is likely no rhyme or reason to why some people can do very well in the stock market.

This morning, as I was staring at the results again, I began thinking about it from an OpenView perspective.  What did these companies do that made my seven-year-old want to buy them?  In Apple, Google, NIKE and McDonald’s – it was a product decision; my son is familiar with their products.  He has had great experience with all of their offerings and thought it would make sense to own their stock.  The underlying thought here (not his now, my own) is that if you build a good product that works and people enjoy using, you will sell more and increase your company’s value – overly simplistic, I know, but it clearly works!  My son picked TJX because he knows that when we shop there, we get a lot more for our money – for the expansion-stage company, that is simply having a good value proposition.  For GM and Harley (and, to a certain extent Apple as well), marketing won my son over – seeing a Corvette or Harley commercial gets you excited about the product and the business – it’s Marketing 101.

While I set out to teach my son a thing or two about the stock market, he ended up teaching me a whole lot more!  Now, if only that $3,000 “investment” wasn’t just play money!

Ricky Pelletier

Partner

<strong>Ricky Pelletier</strong> focuses on identifying and analyzing various market and investment opportunities. As a Partner, he works with other members of the OpenView investment team to structure and conduct diligence on new investments.