The Stock Market
Start Your Own Business
Money for College
Jobs, Jobs, Jobs!
Dollars By Design
Living on a Tight Budget
History of Currency
A Shoplifter's Story
ON2 Money Credits
TOM GARDNER, "MOTLEY FOOL" INVESTMENT ANALYST: Well, unfortunately, I think right now a lot of the materials that are out there for people to learn about the stock market aren't terribly fun.
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.
Brothers Tom and David Gardner believe that
investing doesn't have
to be dull.
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.
ON2: 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.
|"The younger you are, the greater advantage you have because time is on your side, and it doesn't matter whether the market goes down or up in the short term because over the long haul it goes up."|
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.
ON2: So start early is what you're saying...
TOM GARDNER: Absolutely. And I think the reason that a lot of us didn't start early is that, again, that disconnection is there. We don't realize that, hey, if we buy, let's say, buy baseball cards or we're thinking about buying a car when we're 18 or any variety of different purchases we make from compact discs to videos to books, there are great companies right there that are offering those products that we could simultaneously invest in. And hey, if you invest successfully in say a company like Borders, you just paid for all your books over the next 10 years.
So, I think it's that key connection to look at what we buy and love as individuals and to recognize that we could buy our first share of stock in that company and become a part-owner.
ON2: Say we've found a company that we're interested in.
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.
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."
"Every ten years 75 percent of the stocks that trade under $5 a share go bankrupt."
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.
SOCIALLY RESPONSIBLE INVESTING
ON2 speaks with Dr. Ritchie P. Lowry, author of GOOD MONEY: A Guide to Profitable Social Investing in the '90s. Dr. Lowry is co-founder (with his son, Peter) of Good Money, Inc.
What is Socially Responsible Investing (SRI)?
Dr. Lowry: SRI is just like traditional investing in that social investors want the same kind of financial rewards: capital gains, income, preservation of capital, etc. However, social investors also want two additional things: they don't want their investments to do harm, and they do want them to do some good.
They therefore avoid investments in companies with bad social records and target for investment companies with good social records. Socially responsible investors look for companies that want to make the world a better place.
When did SRI first begin?
Dr. Lowry: The very first social investing goes back a century when some churches and colleges used the "sin screen": no tobacco, alcohol, or gambling connections. Recently, social investing spread during the Vietnam War when groups like the Methodists and Quakers didn't want their investments going toward the war effort.
The movement really took off in the 1980s at the time that individuals and funds began selling off their stock from companies doing business in and with apartheid South Africa.
By what method do you choose the companies that you put onto your site?
Dr. Lowry: Three ways. First, we follow the stocks of companies that are the favorites of other socially concerned money managers, fund managers, and individual investors.
Second, we often find companies mentioned in news reports and other sources that have socially positive programs, practices, and products or services. Third, organizations like the Council on Economic Priorities and Working Women magazine give annual awards to companies for such things as the best environmental record or the best places for women to work.
How do you find out whether a company has a good social record or bad social record?
Dr. Lowry: All kinds of sources, including newspapers, magazines, newsletters, radio and television reports, and the like. We also often do our own research by contacting the company for additional information.
Explain how a company can do social good.
Dr. Lowry: There are all kinds of things that concerned investors can screen for: good records for hiring and promoting women and minorities, honest reporting to the public about business practices, excellent environmental records, so-called family-friendly practices (day-care), etc.
Give us an example of an environmentally friendly company and a socially responsible company.
Dr. Lowry: Consolidated Papers is a forest products company that practically invented the idea of using recycled paper in contrast to the typical practice of chopping down forests. Johnson & Johnson has exceptional family-friendly programs for its employees.
Ben & Jerry's does social good but it's not a great stock...is this something you would encourage people to invest in?
Dr. Lowry: No. The point in investing is to make money, not lose it. We track Ben & Jerry's, though, because of their good social record and because at some point in time their business may turn for the better.
Could a socially responsible investor want an anti-abortion fund?
Dr. Lowry: Sure. Socially concerned investors are concerned about a host of issues and these are not necessarily confined to the "liberal" end of the political spectrum. Some concerned investors are not only interested in the issue of abortion but they are also concerned about what they see as pornography in motion pictures.
Does someone make as much money from SRI as they would any other form of investing?
Dr. Lowry: The research indicates that social screening has no negative impact on returns. Investment returns depend upon the investor's financial skills and, of course, a little bit of luck. Social screening can in some cases enhance returns since it permits investors to avoid the company dogs that may have serious labor, environmental or product problems.
How have critics responded to SRI?
Dr. Lowry: SRI has been criticized by both the political right and the political left, which makes me think that we must be doing something right. The left has accused us of selling out to capitalism, which they see as an inherently evil economic system. The right has accused us of being left-wing flakes.
Does SRI really make a difference in the world?
Dr. Lowry: Studies indicate that the South African divestiture movement played a major role in bringing down apartheid in South Africa. There are also dozens of individual cases of even the most hard-nosed and aloof companies being influenced by socially concerned investors.
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.
ON2: That's great. That's what shareholding is all about.
TOM GARDNER: That's right. I mean, after all, you're a part-owner of the business, and they're going to increasingly, I think these public companies are going to recognize that they have a real responsibility to you to hear from you if you want to say something to them and also to make sure that you get information.
We're very lucky to be young and in this environment because even, again, just 10 years ago, but certainly for decades up until then, it was really an exclusive world where there were only a certain number of people who knew what was going on in the business. They were the investors in Manhattan. They made all the money on these public companies. It's very exciting, and it's a wonderful thing that in America, at least right now, increasingly more and more people across the country can be part-owners and can expect to get good information about what's happening.
ON2: What's your favorite part of the stock market? When you were 17, did you think you'd grow up and devote so much time to it?
TOM GARDNER: I had no idea. David and I, my brother and I, were both English majors in college. So we weren't sitting there, thinking, "This is what I want to do, I want to go out and follow companies every day and learn how to invest and make money." If anything, we were thinking about high school baseball. And ultimately we were English majors.
I think the attraction for us to it came from our dad, and our dad used to make it clear to us. I remember, there was a company we owned that used to make an unusual product, Pudding in a Pocket, and you'd tear off the top--they were called Squeeze-Me's. You'd squeeze them and you'd eat the pudding right out of the pocket. And we actually, our family owned a very small, you know, we owned like say 50 shares of that company. And so Dad would say "Hey, let's buy some more pudding. Let's go, we own those guys. Let's get more butterscotch pudding."
That connection was there for us of wanting to buy from companies that we believed in and end up rooting for companies that we believed in, and becoming part-owners of them even if it was just a share or a few shares, in a world where there's really a disconnection and companies kind of take advantage of that. I mean, I think there are some companies doing things. I think a lot of people in their teenage years are going to college, there are a fair number that are going to have an anti-corporate mentality if they go through thinking businesses are taking advantage of people, and they're environmentally, they're polluting our neighborhoods.
The nice thing about the company is you end up having a say in how they work, and you can communicate to them. And so that's one of our hopes that, as really across the board America everyone becomes shareholders, you can really have an effect on businesses - good and bad - and expect that your voice will be heard.
So I think it's a combination of that daily connection that Dad gave us and then the sense that things are changing and you're actually going to have a say in how corporations work in America that really motivated us to get into this. But we weren't really thinking about it a lot at age 17.
ON2: How did the pudding stock go?
TOM GARDNER: The pudding stock actually did pretty well. It did not do extremely--it was not a great investment. Actually the best investment that our family made was in the Washington Post, which was just our local newspaper. And my dad has held that stock for 30 years now. It's just a great example of so many different ways of how investing should work. It was bought and held for most of his life. He bought a company that was local to us that we bought every day, we read the Washington Post.
A lot of people, when they start this, they think it's so far removed from me, the language is totally removed, don't really know how I would assess which business to buy, or what a stock is. And I think if people just view it as the products and services that they use every day, every month, those companies often make the best investments out there, and they're very easy to follow.
And it does become fun
when you start doing it. You start going, "Hey, you know, our guys
had a really bad year this year. I'm going to call them up and ask them
what's going on here!" And
one of the stocks I bought was a company that made these little croissants
in a box. I was eating a fair amount of them. The company ended up doing
very poorly and the stock did very poorly. And so part of the deal is you're
going to have some losers, but if you put the whole thing together and start
saving early and adding a little money regularly, even if you have a couple
of bad investments, it's not going to matter.