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 finance.google.com. 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 finance.google.com 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.