I recently helped my 11-year-old daughter buy her first shares of stock. She knows that my job involves the stock market. So over the years she has become a casual student of the game.
She has heard me whoop and holler on a morning when I've awakened to find one of my holdings has been bought in an M&A transaction. And she knows a little more profanity than I wish she did - the result of an occasional earnings “blow-up.”But it was sure pleasing to hear her ask one day if she could take some of her allowance money and move it from her savings account "to the stock market." Her innocent view of the stock market made me ponder how much I've internalized how things work, where "money goes," what shares "look like," and so on. So after I agreed help her, we sat down to select some stocks. Surprisingly, she already had a plan. It seemed she'd heard enough 'stock talk' on the TV to tell me with some certainty that she "wanted a growth stock and a value stock." Cool! So we sat on the couch, fired up her iPad Mini and proceeded to Yahoo Finance. "When they say 'growth,' what is it that's growing?" I explained that it usually meant sales or earnings growth. And off we went, deconstructing a whole lot of concepts and words with which I'd perhaps grown too familiar. Sectors. Diversification. Cycles. Cash Flow. Trying to simplify their meanings, but not dumb those meanings down. Over the course of a week, we talked most evenings about stocks and markets and commissions and she gamely hung with it. We looked up companies, looked at their growth rates and whether they paid dividends (and whether they generated enough cash to do so). And even though we didn't have a check-list, we naturally seemed to arrive at framework of investing: