October 8, 1998

Market-Savvy Teens Take on Wall Street
by Rick Aristotle Munarriz (TMF Edible)

Doug Sherrets is pounding the table over the value of Infoseek (Nasdaq: SEEK). He's eager to tell his growing subscriber list of 600 e-mail newsletter readers, as well as visitors to his MrMarkets.com website, that the shares are a bargain at present prices. Doug would back up the truck -- if only he were old enough to drive.

Doug turned 14 back in May. At a time when most of his friends are busy on the football field or playing Nintendo, his passion lies in the stock market. He is just one of the many youths who have discovered what most of us learn much later in life -- it's hip to be fiscal.

Brent Harris, who will turn 17 in December, has been interested in the stock market for as long as he can remember. Brent's wisdom made him a natural as a volunteer in a medium that doesn't ask for ID. Foolish beyond his years, he hosted The Motley Fool's financial services industry forum and lent a hand to The Motley Fool Investment Workbook.

Brent has since returned to being a full-time student, but his fascination with the stock market continues to grow -- as do the legions of even younger investors. By some standards, Brent is already an old-timer.

While the bull market has helped draw attention to the potential riches in the stock market, most kids are often turned away at a common roadblock. It takes money to make money. That certainly hasn't stopped Michelle, a 14-year-old who posts as ShorGirl17 in the Teens & Their Money message forum on America Online, from making the most of what she has.

When a financial planner stopped by to meet with her parents, she caught the investing bug. She transferred her savings into a pair of mutual funds with low initial investment requirements. Michelle then began to buy stocks directly when she purchased six shares of Disney (NYSE: DIS) earlier this year.

With the advent of rock bottom commission rates from deep discount brokers and the rising popularity of dividend reinvestment plans, the market is no longer exclusive to those with large sums of capital.

"Teens and many adults have the misconception that you need thousands of dollars to invest, or that you have to buy 100 shares of something when you first put money in," Michelle says.

Michelle has now set her sights on her next odd lot purchase -- denim and khaki powerhouse Gap (NYSE: GPS).

Now, a child can't simply walk up to Chuckie Schwab with a blank check and a buy order. Legally there are restrictions on the types of accounts a minor can open. A chief stipulation, be it in a custodial or a joint brokerage account, is that a named adult has control over the account. However, nowadays it seems that savvy teens are calling their own shots.

With the popularity of online trading, it simply does not seem feasible to verify who is placing the order on the other end as long as they know the account number and PIN Code. So are these freethinking teenagers breaking the law when their trades are not authorized by their parents -- even if it's their money? Probably, but isn't that argument rather lightweight? A child who has the ability to spend his or her money on clothes and music, practices that involve a similar trend analysis to that of equity window shopping, seems more than capable of learning how to participate in the stock market. At least in the stock market there is a good chance that the purchase will appreciate over time rather than be immediately squandered.

For better or for worse, the Internet has played a key role in getting online teens logged on to their financial futures. With stock sites just a click away, cybersurfing youngsters are more likely to check out a colorful and interactive investment forum than generations past were to check into the dry reads of two-tone business dailies. Through pop culture magnets like The Hollywood Stock Exchange, where investors of all ages place mock buy and sell orders on new film releases and the movie stars themselves, the suddenly sugar-coated stock market mechanics have bred an engaging hobby with material consequences.

"Because of the Internet, what we have today is increasingly better distribution of information and the rise of discussion groups like The Motley Fool, which combined together allow an individual to see how people using the same information can react in distinctly different ways," Brent says via an email interview. "The interactions of people and their analysis of information fascinates me. Of course, the money doesn't hurt either."

No, the money certainly does not hurt. Before Doug shelled out the $70 for the right to his MrMarkets Web domain earlier this year (a family friend convinced his local Internet provider, Radiks Internet Service, to host the young financial writer's site for free), he was attracted to the stock market. That came in 1996 when his sixth grade class entered a stock picking contest. With only rudimentary knowledge of how Wall Street ticked, but a knack for knowing what he liked, he submitted a buy order for Tyco Toys. Like a Tickle Me Elmo, Doug laughed his way to one of the top rankings in his state when the shares more than doubled after a buyout bid from Mattel (NYSE: MAT).

He then absorbed everything his father could teach him about the stock market. His uncle, a financial professor, continued the tutelage, and he read through Peter Lynch's Learn to Earn. A pre-teen trained in Lynchian ways? Maybe we're not doomed after all.

He eventually wound up, like Michelle, cleaning out his passbook savings account and putting the money into mutual funds. After tracking the daily net asset values for awhile he got proactive. He bought Viacom (AMEX: VIA) at $29 a share.

The stock has doubled since then. Gap has also had a strong run lately. How are kids being drawn to these equity winners?

"As a teenager, I often have insights into the market that adults may have overlooked," Brent says. "Essentially, I have the advantage of discontinuity of thought."

Shedding conventional wisdom apparently has its advantages. Both Tyco and Viacom were troubled entities when Doug happened across them, yet as fickle purveyors of quality, teens seem to know the hot trends long before stodgy grown-ups do. Some of Peter Lynch's greatest stock picks while he ran Fidelity Magellan came when he followed his wife and kids to the mall. This is not to say that the world will soon be overrun by adolescent money managers, as age does have some benefits.

"There are disadvantages to not having the experience that people 20 and 30 years my elder possess," Brent says. "For example, I really wish that I could have seen the ups and downs that they've been witness to."

True. Michelle and Doug were potty-training two-year-olds when equities were flushed down the toilet on Black Monday in 1987. Is the question of whether or not these young stock mavens are braced for a prolonged bear market valid? Perhaps. However, they also have the advantage of so many more years in which to watch equities perform their compounding magic. So you might be envious over today's investing youth -- just don't feel sorry for them.

Other Links of Interest:

Young Fools -- Teens & Investing
The Family Fool -- Foolishnes for the Entire Family
13 Steps to Investing Foolishly