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Learning About Stocks: My Nephews Stock Pics

Earning Money As A Child

Over the weekend, I had my family come in from out of town and they spent a week with us. My nephew made the Junior Olympics and was out in Colorado for two weeks before that. It costs a lot of money to ski, and so we sent him a check as a “donation” to help him get out there and to pay for the runs and the lift tickets and the entry fee and everything else.

His dad, my brother-in-law, said that he wanted Aiden to work off the money that we gave him. When he came down, Aiden thought I was going to give him physical labor to do. I said, “Nope. You’re coming to the office and we’re going to talk stocks.” To which he was totally confused by, which just made it all the more awesome.

Learning About Stocks

When I was younger, I think in sixth or seventh grade, my uncle gave me a little blue book that would come out monthly that had every single ticker symbol, volume of shares, price, yield, dividend, all the stats in the book. I would go through one by one and I would have to find certain companies based on the parameters he gave us. One of the parameters he gave us was to look for low PE ratio, that’s price-to-earnings ratio and a high yield.

The PE ratio is the ratio of a company’s stock price to the company’s earnings per share. The PE ratio is used in valuing companies. The average PE of the market varies in relation with the predicted growth in earnings, the expected stability of those rising (or falling) earnings, inflation, and yields of competitor investments. Yield is the quotient of earnings per share divided by the share price. It is the reciprocal of the PE ratio. This number can be used to compare the earnings of a stock, sector or the whole market.

He would then use our picks and evaluate them to see if he wanted to purchase the companies. We would find usually a dozen.

Teaching My Nephew The Way That I Learned

I thought, let’s do the exact same exercise with Aiden. I first instructed him to, “Go buy a Barron’s paper and a Wall Street Journal.” Come to find out, Wall Street Journals no longer put the ticker symbols in there on their, at least in this daily version. Maybe on the weekends they do. Luckily, he bought a Barron’s and it had the New York Stock Exchange in there along with the NASDAQ.

He went through and he picked out 24 companies that had high yields and low PE ratios. All the PE ratios had to be around 10 and all the yields were over 8%.  What we’re looking for here is not growth companies. We’re looking for was the opposite. Low-growth companies that pay out a large percentage of their earnings.

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The Unexpected Outcome of My Nephews Research

My initial thought was we were going to get a lot of oil companies or finance companies or we close-end funds. Closed-end funds I want to stay away from. We were going to get energy companies and real estate companies too, that was my guess. Of the 24 he came back to me with, he decided to pick six of them and narrow it down. See the stocks that he picked here. The different colors represent the different industries.

Building Exposure For The Next Generation

To make it interesting, I said, “Aiden, what happens if we opened up an account, a brokerage account. We’re not going to mention any names. I wrote a check and we put money on each one of those. You could track it on a daily, weekly basis. It’s up to you to decide when to sell and when to buy. Oh, by the way, if you want to throw Nike and Under Armour and Snap Chat in there you can, some of these other companies that resonate with, please do that.” I told him we’d split the profits 50/50 but he has to manage the portfolio.

My goal with all of this is just to build exposure for him. I also turned around and recommended he read Rich Dad Poor Dad, which was, as you can see in some other blog posts, my jumping-off-the-cliff book that I read, but not until my senior year in high school.

Are You Pivoting On Technology Or The Market

Great Ideas Come From An Inflection Point In Technology

Andy Rachleff was a big hedge fund guy that helped start Benchmark Capital. If you’re in the startup scene, Benchmark Capital will not mean a lot to you. But Benchmark went on to fund Uber, Snap, Ebay, Juniper Networks, and many more. I felt compelled to write this post after I listened to the podcast. In fact I listened twice. He said something that I found very interesting. He was talking about startups and positioning and how most people do things backwards. That most people sit around and they look at an industry and try to find the holes or the problems in that industry and then build solutions around that. Andy says, “Great ideas come from an inflection point in technology.”

He says, “You should start with the technology or the product and then figure out people or industries or markets that need it. That crave it.” Once you think you found the market, he says, “Start with and define the value hypothesis before you define the growth hypothesis.

Three questions: What, Who, and How?

So what is a value hypothesis? Three questions: What, who, and how? So what are you going to build? Who is desperate for it? How will it be delivered? In other words, what is the business model? There are two key tests you may want to put your business through in order to ensure the greatest potential outcome of success. That is the value hypothesis and the growth hypothesis.

The value hypothesis tests how much value the product brings to customers. For example, if a products function is antiquated, the value of that product is diminished. This test should be performed early in the stages of the development of your business model.

The growth hypothesis tests how your customers find your product. These are your distribution channels and in some cases your advertising channels. This test should be performed frequently. Be sure to perform this test only after your value hypothesis.

Most people think to pivot or iterate on the product, not the market. So they say, “This is the market. We’re going into this market. But the product’s just not right. Keep iterating and pivoting on the product, the product, the product.” He says, “That is wrong. Stick with the product, stick with the technology. Find a different markets until you find a fit.”

Pivot On The Market: Make Your Big Bang

Now that I look back on that, one company that I did sell, when we started it, we only focused on the technology and we fell into the market. Which at that time was restaurants and bars that then expanded into salons. But when we were first developing it, we just focused on the technology. So we must’ve got that right by mistake.

He goes on to say that the number one question when you’re talking product market fit is this question. “What do you uniquely offer? What do you uniquely offer that people are desperate for? And if people are not desperate for it, it will not be or it will not have a big bang.”

I mainly wrote this post for myself so I can look back and stay focused on this and on some of the new projects we are working on. I will keep you guys posted on how it goes.