The association a lot of people have with financial writing is that it’s dry, Saharan, desert dry, and that there’s a lot of jargon, and it’s pretty much disconnected from our daily lives.
And what people need to see is that there really is a connection between companies that we buy from and the investments that we make. And that when you look at it in that fashion and you recognize that over the last six years one of the best investments out there has been Hershey’s, which means just following Reese’s peanut butter cups and Kit Kat bars and York peppermint patties and Twizzlers, it’s a lot less removed from our daily lives than we think. I think when that connection is made, it becomes a lot more entertaining.
WHY SHOULD TEENAGERS CARE ABOUT WHAT HAPPENS ON WALL STREET?
TOM GARDNER: Well, teenagers have the greatest number of years ahead of them to compound growth on their savings, which generally means–it’s a basic mathematical principle. We may have learned how to calculate the volume of a sphere in high school, but some of us just didn’t get the basics about growth rates and what happens, let’s say, if you just start with just $50. And you end up growing that at 10 percent a year for 50 years. Well, in the first year you’re only going to make $5. But by the time you have $10,000, 10 percent will be $1,000. And then when you have $40,000 10 percent growth will be $4,000.
And so the older you are, the less time you have to grow that base of saving. The younger you are, the greater advantage you have because time is on your side. It doesn’t matter whether the market goes down or up in the short term because over the long haul it goes up. So kids and teenagers and college students have an incredible opportunity. It’s just unfortunate a lot of them end up with a credit card pitched in their mailbox their first day of college and end up borrowing money, rather than starting to save and invest.
WHAT’S THE BEST WAY TO GET STARTED?
TOM GARDNER: Okay. Let’s say that we’ve looked at it, and we’re like, you know what, we’re addicted to coffee. We can’t get through until noon without two cups of Starbucks coffee. So Starbucks is a company that’s traded on one of the three exchanges, the NASDAQ.
And what we would do is we would first want to call up Starbucks. So we’d walk into our Starbucks store, get our coffee, and say, “what is the phone number of your corporate headquarters?” And they’d tell us. Then we’d call them up and ask that a financial packet, an investor packet, be sent to us. And that’s going to be a whole bunch of materials about the company, let’s say, 70 percent of which are readable, decipherable for anyone, 30 percent which may be some jargon that’s difficult to get through.
We’ve gotten those materials, and at that point we want to, I think, using the Internet, going around, coming to our site, going to a couple of sites and asking people about, say, Starbucks, you’re going to start getting a better sense of how the business works. You might feel comfortable buying your first four shares and the stock’s trading, let’s say, around 30. So that’s going to be a $120 investment.
The most difficult part of this process from an administrative standpoint is opening a discount brokerage account. It’s the thing that a lot of people procrastinate over because it just seems like, well, I don’t even know how to do it.
But really it’s like opening a bank account. Because hey, we’re here online, people should know that the very best place to do it is through an online broker because they charge–their fees are so low because their expenses are so low to run their business. Just get an online discount broker, say, “Put in a couple of hundred bucks.” Say, “Hey, I’m going to buy three shares of Starbucks or Hershey’s or Tootsie Roll or Microsoft, and I’m just going to follow it and see how it does over the next year, and try and learn a little more about the business as I go.”
ON2: And should you worry about buying and selling at that point, or what’s your investment strategy?
TOM GARDNER: The best time to sell is never. If you can find the right company, you’re going to be able to hold it for many, many years. There will be individual situations where you say, it’s not going very well and I think I want to sell, but what a lot of people get caught up on in the stock market is the movement of stock prices every day.
It’s up from 30 to 33, should I sell? It was down from 30 to 26, should I sell? Should I take my profits? Should I take my loss? And in general, that sort of thinking, unfortunately, is encouraged by Wall Street because Wall Street makes money when we make trades. They want us to trade frequently because then we have to pay them fees. But when we look at really the bottom line returns and the performances, stocks in the 20th century, what you really want to be
doing is just buying and holding really good companies that you believe in.
The best investment in the 20th century has not been something obscure and unknown to us. And it hasn’t been something that demanded a lot of trade. It was Coca-Cola. It’s been the best company out there. And had you put a $1,000, had your grandfather put $1,000 in Coca-Cola in 1919, today it’s worth over $115 million. And that comes from not trading at all. And I know it’s an extreme. It’s a somewhat outrageous example, but it’s the perfect one because the company that we all know, it’s around us, you know, every day. The only way to have gotten those returns was to have just purchased and held straight through for as long as possible.
ON2: Selling… is that one of the most common mistakes?
WHAT ARE SOME OF THE PITFALLS?
TOM GARDNER: There are a couple of pitfalls. Selling is a really difficult thing, and that’s why I would say, like right off the bat, you want to just concentrate on not worrying about selling, trying to worry about you’re buying, and the quality of what you’re buying, the business.
The biggest mistake that I think people make is they view the stock market as like a speculative, gambling scenario, where it’s kind of hit or miss. What a lot of people do is they buy stocks that are trading under $5 a share because they think, “I can get a lot of shares, and it’s going to be volatile and I might double my money in the next three months.”
Unfortunately, what happens more often than not with those really low-priced companies, they go bankrupt. In fact, every ten years 75 percent of the stocks that trade under $5 a share go bankrupt. A lot of people go in there because they think low-priced gambling, have fun. And, in general, you really want to stay away from that group, and you want to just focus on making sure that your first buy and all of your stock buys are in companies that you know because you use their products every day or every week.
ON2: Could you explain. What does it mean “to you buy a share of Starbucks,” for instance? What does that actually mean? What do you get?
TOM GARDNER: That’s a great question. What you get most clearly is an ownership stake in the company. You can say I’m a part-owner of Starbucks, much as you would be a part-owner of–there are people who own baseball teams, and they own 10 percent of the baseball team because they bought 10 percent of the shares that make up the total value of that company.
Let’s just take a hypothetical company. We’ll just create Leah’s Chocolate Company. And let’s say that it has a million shares of total ownership out there that can be bought or sold and that the stock is trading at $5 a share. That means the value of the company is $5 per share times the total shares, which is 5 million. So the total value of the company is $5 million. If you bought one share at $5 a share, you would have that tiny little piece of ownership and 99.9999 percent would be owned by the other shareholders.
So basically what you’re doing when you get a share is you get that ownership stake. It’s going to mean that the company is going to communicate. They’re going to send information to you about how their business is doing. What you’re ultimately cheering for is for the overall value of their company to go up, then to expand, to build Starbucks stores in Europe, in Asia, and to grow their business. So that the overall business is worth more and your shares appreciate or go up in value.
ON2: Will they ask me whether I think certain ideas are good?
TOM GARDNER: If you had asked that ten years ago, I would have said, no way, but things are changing now because of the Internet, and companies are increasingly trying to communicate with both those people who buy stuff from them and also their shareholders. There are some tricky things about that. But I think what’s starting to happen on the Internet right now is that there’s a greater feedback mechanism between the company and its shareholders and also its customers.
Right now, we’re kind of on the threshold of them caring what you think about what’s going on in their stores. And five years from now they’ll be asking you to share, to write up a one-page note, if you would, sharing how you think Starbucks could do an even better job than they do today. What’s incredible about that is, it’s exactly what all these companies should want. They should want to hear what people using their business, buying stuff from them, really want from the business.
And I’m sure, for example, if Starbucks were to set up a big Internet site and say, “Hey, share your ideas,” they would get an incredible number of great ideas from people across America saying, hey, it’d be really great if, you know, if I could pick up this magazine when I was in there, or it would be great if you offered this type of juice, or this other sort of coffee, or put this kind of cookie in there. And obviously there’s a lot of noise in there with so many people contributing, but it’s going to end up, I think a lot of companies are going to do it because they’re going to get a lot of great ideas.
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