No children were insulted in the writing of this article. In fact, our youngest gave me the subtitle, and is the lead character in the story. (Read Part 1, here)
As they were growing up, our kids were learning how to allocate scarce resources from their allowance and sports refereeing earnings between immediate gratification (a treat at the hockey arena), delayed gratification (saving for a new video game) and true savings in their bank accounts. As their savings grew, we would go to the bank annually to move money from their savings accounts into “high-yielding” GICs, which were about one per cent at the time. We kept the GIC duration short in the hopes of better interest rates which never happened.
In 2009, I asked if they would like to invest in stocks to get a much better return and learn lots along the way. They were surprisingly keen and instead of renewing GICs, we set up in-trust stock accounts, which were converted to TFSAs when they turned 18. At the youthful ages of 13 and 16, their accounts started with the princely sums of $1,923 and $4,933. For the intervening 11 years, our youngest earned the following rates of return by year: 10.1, 7.1, 5.2, 8.7, 18.5, 11.1, 18.2, 11.3, -10.8, 15.7 and 3.7 per cent. At the age of 24 and still pursuing an advanced degree, his TFSA would make most working adults envious.
For the most part, he has adopted his father’s investing rather than a speculating approach and is picking his own stocks. However, with the current speculative fervour, in late November 2020 he excitedly texted that he had purchased 30 shares of EH for $13.01. I know the ticker symbol for a lot of companies but had never heard of EH. He informed me it was a Chinese start-up making drones and large flying electric vehicles, with rapidly growing revenues, low debt and positive test flights.
My comment was it was a small position so if he lost it all, it wouldn’t have a material impact on the portfolio, and he would learn his lesson. After all, Chinese, start-up, negative earnings and negative cash flows — what’s not to love? Reportedly, about 300 fraudulent Chinese companies have floated shares on North American exchanges, like Sino-Forest which traded on the TSX a decade ago. If you wish to invest in China, my suggestion would be to do so through an ETF like FXI or EEM.
As EH skyrocketed our standing joke for two months was he sure was learning his lesson! With a small amount of encouragement, he sold in January at $74, over five times his purchase price in two months. EH spent the next month bouncing between $70 and as high as $125, then on February 16, it dropped $77 to $46 on a short sell- er’s report and potential security violations. It, of course, denied the reports and recovered half the loss a day later. Whether EH is a fraud or a legitimate start-up will play out over the next few months. Last night, my son texted me, “OK, maybe my pick was more luck than skill.” To this I responded he’d had the best of both worlds — making money while experiencing a valuable lesson.
This past year, as people were idly sitting at home, they took to stock speculation for entertainment, with internet brokerage accounts exploding by a factor of three. The vast majority of market participants are traders and speculators, and the vast majority of podcasts, YouTube channels, presentations and other forms of education are focused on what most people do, trading and speculating. Much of this education would focus you on improving luck, which is an impossibility. All short-term strategies are luck-based. Can a speculator uncover five positive speculations in short order? Sure, just like you can occasionally flip five heads in a row. That does not make them a genius.
Most who achieve success with luck will continue to pursue this approach, eventually failing as in Vegas. Unfortunately, each generation seems to go through this approach, with many dropping by the wayside, to forever eschew the great wealth creation ability of true stock investing. Also, unfortunately, this generation is going through this process partly with free money from governments, which will eventually come to roost on taxpayer’s shoulders.
While my son may periodically stray from true investing, as we all do, I’m confident he will keep that portion of the portfolio to a small acceptable percentage. Lesson learned!