Child-Labor Hedge-fund

About a month ago,  I noticed that Caleb was always doing something he called “research”.  I asked him about it.  He said that there was a program at the zoo where you could write research papers and for each paper, you get a point.  The requirement for a research paper was that you had to write 10 facts about an animal.  If you write 50 papers about 50 different animals, then you can get a replica of a fossilized dinosaur egg.   So, Caleb spent a lot of time on Wikipedia looking up interesting animals and fun facts about them.  I noticed that he really loved doing this.  I looked in his folder and he had written over 60 papers.  I asked him why he did so many when he just needed to do 50.  He said that he just liked doing it.  It was fun.

Oh…. maybe this is his calling in life… This is something he’d do, even though he doesn’t have to.  It was fun!  Then I thought, maybe he could do some research on stuff that might be more productive… or even better – more profitable… Leave it to me to turn something pure and fun into a grimy, money-making scheme…. If there are a group of dads that can suck the fun from the marrows of a pure and enjoyable activity, I’d be the president.

I asked if he would be interested in doing stock research on companies.  Eventually, it would be to figure out which companies he might want to invest in.  He said he’d give it a try.  So that night, I created a simplified template for what a stock research paper might look like.  I also made a list of about 100 public companies from a stock screener on Google.  The next day, I went through the template and showed him where he could find each piece of information using Google Finance and Yahoo Finance.  I wanted him to get the stock price, company description, P/E, Forward P/E, Analyst earning estimates for the next year, and dividend yield.  We chatted about what each of these things meant and what was good and what was bad.  And for each research paper, I wanted him to write his own commentary on the company and give it a rating. 

I figured he probably needed a motivating reward for doing this… kinda like the dinosaur egg… Although I don’t really want to resort to money, it’s always an easy answer.  I told him that I’d give him 50 cents for each research paper and we can go to Walmart or Target so he could spend it after every 10 papers…. but if he wanted to save it, then I’d give him a dollar for each paper…   He said he’ll take the dollar… smart boy…  

I went to work that day wondering if he was actually going to produce anything.  The paper was a bit intensive and he had to do quite a bit of navigating around to get all the data.  When I got home, he excitedly told me that he had finished three papers, but he couldn’t get the earning estimates because he forgot where to get them.  Wow!  I was impressed.  I showed him where to get the estimates then asked him to tell me about the companies he researched.  He talked about the dividends and the P/E and told me about his ratings…  I complimented him on his work and encouraged him to finish a set of 10. 

When I got home the next day, he had finished 11 research papers!  He was also super excited about a few of his finds.  There were 3 companies that got a ratings of 8’s and 9’s from him.    One was FSC  (Fifth Street Finance Corp) because it had a dividend yield of 10%, and analysts anticipate continued earnings growth.  The other two were Smith and Wesson and QuestCor Pharma.   At a glance, they all definitely seemed like good candidates for further research.  I immediately transferred $10 into his bank account as promised.  I was thinking that was $10 well spent.  I told my friend, Michael about this, and he accused me of running a child-labor hedge-fund.  I guess it would only be bad if it was “forced” child-labor.   But, I make sure that Caleb understands that he can stop any time… and go live with some other family…   The program is completely voluntary.

I had to simplify a few concepts, but he caught on pretty quick.  He latched on to the idea of value using the P/E.  I told him that you can think of it as the number of years it would take for you to make your money back with the company’s profits.  So, for Microsoft with a P/E of 13.5, it’d take 13.5 years to get your investment back.  For Netflix, with a P/E of 233, it’d take 233 years.  He didn’t like that.

Eventually, we also had to talk about growth and why we would pay more money for a growing company, then a “mature” company.  We started talking about companies in terms of the PEG ratio to integrate all these concepts.  Then, we had to distinguish between using historical growth vs. future (anticipated) growth for the PEG.    As we looked at different companies, we found interesting earning patterns and had to dig into the annual report of Delta Airlines to figure out that they had some accounting changes.  It might be interesting to get on an earnings call with him and try to explain what in the world they are talking about… Maybe an earnings call of a distressed company might be more fun than one that is doing well.   It might also be fun to go to an annual stockholder meeting.  We’ve been to Berkshire Hathaway a few times, but maybe it might be more interesting now since he’s thinking about the company’s earnings.

It seems like Caleb is enjoying this research work.  Much more so than working on bicycles.  He’s up to 20 research papers.  I’ve been pushing him to be much more quantitative on his commentary and he’s working on a more systematic rating system.  Hopefully, it stays fun.  There’s so much material to learn…  Maybe, he can find some other kids to create an investment club.  It’s always good to lose money together with other people when you first get started… well… maybe not always… but at least you have someone to commiserate with…

If you’re looking for investment advice, Caleb wants everyone to know that he’s open for business.  He says $1 for every stock you buy based on his recommendation…   but, just a reminder that he’s not a licensed investment advisor… and he’s nine years old…

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