The Value of Things

This week, I started talking to Caleb about stocks.  We have an ESA (Education Savings Account) for him at Ameritrade, and I told him that if he wanted, he can pick some companies he would like to own.

Our first discussion was about how much _should_ things cost – the value of things.  We talked about earning 5% a year on bonds as a baseline.  If we invest a $100 in something, we should expect to get at least $5 back/year.  (This is, of course, a bit simplified as we haven’t discussed risk adjusted returns). 

Then we started looking up all the different companies that he knows on  I was surprised at how many public companies he could name off.  We discussed the dividend yield and the Price to Earnings ratio.  We went back and forth for a long time on what an “expensive” stock meant.  He had a hard time looking beyond the share price, but in the end understood that a high P/E meant expensive and a low P/E was cheap. 

After looking at Disney, McDonalds, Honda, Toyota, Apple, Google, Microsoft, Leapfrog, Nintendo, and a slew of other companies, he decided on Disney (because he likes Disney), and Microsoft because it had a P/E around 10. 

When Tenille walked in the room, Caleb exclaimed, “Mom!  I’m buying some Microsoft.  It’s SOOO cheap!”  She was a little startled.  That comment put a smile on my face.  I created a portfolio view in for him that tracks his picks.  I’m sure it won’t be long before I have someone to commiserate with when the market tanks.


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