The Greatest Piece of Investing Advice I've Ever Gotten

I've heard it a million times: "Individual investors can't beat the market, so they shouldn't even bother trying." Or, "The stock market is too risky." Or my personal favorite, straight from the comments section of a recent Wall Street Journal article on how to teach your children about investing: "[S]tay out of the stock market it is rigged against you." 

It can be different
While I do get that there's trepidation on the part of many who have been burned by the market before, it doesn't have to be that way. In fact, I'm teaching my 8- and 7-year-old daughters how to invest, and they're getting a big kick out of it. They've been investing for over a year now, and as it stands they're beating the market by more than 5.5 percentage points! Forget investing wisely; I'm talking about investing Foolishly.

Of course, I play a role in helping my girls choose what stocks they want to buy. But they make the final call. We talk about the various companies that play roles in our lives and we consider the ones that they would feel good about owning essentially indefinitely. I give them a list of four finalists based on conversations we have together and they come to an agreement and make the pick. Then we buy. And then we get on with life.

Oh, to be young again
The beauty of starting them at this age is that their interest and knowledge is in fact limited, which means they're never incessantly twiddling their thumbs over an earnings miss or why same-store sales are down. They don't care! They just think it's cool that they're part-owners of these businesses that play a part in our everyday lives. Take a look at their portfolio holdings and it starts to make sense:

  • Management reported that Apple's (NASDAQ: AAPL  ) gross margin was down almost 600 basis points from the same quarter last year. They also reported the strongest June quarter revenue ever in the company's history.
  • Scale is starting to really pay off for the king of coffee. For the most recent quarter, Starbucks (NASDAQ: SBUX  ) reported a record operating margin of 16.4%, which resulted in record operating income of $615 million.
  • The Lone Ranger was a flop. With a budget of around $250 million, it's only brought in $86 million to date. But Walt Disney's (NYSE: DIS  ) movie segment only accounts for a little more than 7% of annual operating income; I think Disney will survive.
  • Nike (NYSE: NKE  ) just reached $10 billion in annual North American sales for the first time ever. Even more impressive, it's closing in on the $4 billion mark in emerging markets. Nike is ubiquitous with sports all around the world, plain and simple.
  • Under Armour (NYSE: UA  ) is still a small company when compared to the Swoosh, but it's growing like gangbusters. In fact, this most recent quarter marked the 15th consecutive quarter in which apparel grew at least 20%, and the 13th straight in which total revenue grew better than 20%.

It's all about perspective
Of all the great investing advice I've gotten in my life, it all comes back to this: If you want to be an investor and truly maximize your chances of growing your wealth significantly over time, then you need to see yourself as a part-owner of the business(es) in which you are investing and proceed accordingly. You need to be thinking about the future. Not next week or next quarter. I'm talking years. It's not perfect by any means, but investing with this mentality can yield some impressive results. Consider how all five of these companies have fared over the last seven years in relation to the S&P 500:

UA Total Return Price Chart

UA Total Return Price data by YCharts.

Of course, the past doesn't predict the future. But by the same token, there are good reasons these companies' stock prices have done so well over the course of time. And if there's one thing Foolish investing has taught me, it's that many of the winners tend to keep winning over time. So when you find those winners, well, you need to hitch your wagon to those stars and enjoy the ride.

The Foolish bottom line
I don't believe for a second that the stock market is a rigged, untenable game. I'm convinced the folks who do are the ones who need our Foolish advice the most. I'm sure I'll continue to hear people say that the stock market is too risky, and that's a shame. The truth of the matter is, the greater risk is not learning how to invest Foolishly and being a part of it.

Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Click here to follow Jason on Twitter.


Read/Post Comments (18) | Recommend This Article (31)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 05, 2013, at 12:19 PM, jimmybox wrote:

    "Consider how all five of these companies have fared over the last seven years in relation to the S&P 500."

    If there's one thing worth teaching your kids, it's the supremacy of mean reversion in equity multiples and the lunacy of chasing performance.

    Best of luck.

  • Report this Comment On August 05, 2013, at 2:22 PM, AsimovRobot wrote:

    Aren't you the happy camper jimmybox. I have a parade starting in 10 minutes - you are invited to come over and rain on it:)

  • Report this Comment On August 05, 2013, at 3:47 PM, snapperreef wrote:

    jb,

    I don't quite understand what you mean by "equity multiples". I do agree that past performance does not predict future performance though these 5 stocks are pretty representative of S&P 500 type stocks and I see no reason for a major change in their business models.

  • Report this Comment On August 05, 2013, at 6:14 PM, TMFJMo wrote:

    "If there's one thing worth teaching your kids, it's the supremacy of mean reversion in equity multiples and the lunacy of chasing performance."

    @jimmybox: I couldn't disagree more. I'd much rather teach my kids the value in finding excellent businesses and then investing in them for long-periods of time. As I mentioned in the piece, of course past doesn't predict future. But reversion to the mean doesn't have anything to do with what I'm talking about and there's no chasing performance implied here. My kids aren't chasing performance; their becoming part-owners of awesome businesses that will more than likely still be around and relevant in 20 years when they're young adults. Some will win and others won't and that's why they'll diversify along the way.

    But thanks for posting!

    Foolish best,

    Jason

  • Report this Comment On August 06, 2013, at 10:04 AM, jimmybox wrote:

    I love that pointing out the “other driver” of investment performance—valuation—paints me with the black hat.

    A tremendous number of ETFs which invest in “quality” companies have recently cropped up, bidding up their valuations. As it stands, SBUX, NKE, and UA are all trading well above historical averages with respect to their P/E and EV/EBITDA multiples. When earnings inevitably falter and/or sentiment turns, the multiples will revert below their historical means and performance will suffer consequently-- that’s just the nature of the beast.

    So while your kids may not be consciously chasing performance, it’s still transpiring nonetheless. Ignore valuation at your peril.

  • Report this Comment On August 06, 2013, at 10:26 AM, jimmybox wrote:
  • Report this Comment On August 06, 2013, at 10:56 AM, TMFJMo wrote:

    @jimmybox: Odd how you make the leap that I/we ignore valuation. We don't ignore valuation at all. Of course price matters and I said just as much here:

    http://www.fool.com/investing/general/2013/07/12/follow-thes...

    My daughters wanted to buy Apple back when it was $650+ per share and I expressed reservations with them at that point. We put it on their watch list to consider later and they subsequently bought in at $450. They'll buy another stock next quarter and yes, valuation will matter.

    But the other point I'm teaching my kids is to continue to invest on a consistent basis. Some quarters there will be more attractive deals than others and I'm working on teaching them that. But they need to do it on a consistent basis. It's worked out pretty well for us here at The Fool as I'm sure you know. To assume that we ignore valuation is just flat out wrong.

  • Report this Comment On August 06, 2013, at 11:44 AM, jimmybox wrote:

    I'm glad to hear price matters.

    As valuation was not discussed in the article, and you previously responded that "reversion to the mean doesn't have anything to do with what I'm talking about"--a dismissal of valuation, which is mean-reverting--it wasn't much of an inductive leap to make.

  • Report this Comment On August 06, 2013, at 11:47 AM, jimmybox wrote:

    Glad to hear that price matters.

    As your article didn't mention valuation, and your previous comment dismissed mean reversion (the essence of valuation), it wasn't much of an inductive leap to make.

  • Report this Comment On August 06, 2013, at 1:37 PM, Risky88 wrote:

    the problem i have with the idea of

    Part Owner

    is

    if I was actually Part owner I could help make decisions. If my wife is part owner of this house, hell if she's going to let me make all the decisions just because I have larger stake than her.

  • Report this Comment On August 06, 2013, at 5:42 PM, ETPNole1 wrote:

    Jason - gret article. Any suggestions on tools or programs to help teach kids about saving?

  • Report this Comment On August 07, 2013, at 11:11 PM, Tomohawk52 wrote:

    I like the article but I could never invest in Starbucks. I figure one day everyone is going to wake up and say, "I've been paying WHAT for a fricking cup of coffee!?" and their entire business will just evaporate overnight.

  • Report this Comment On August 08, 2013, at 6:25 PM, TMFJMo wrote:

    @Geldej: Well, you do get a vote, so there's that. But really the point is to think like an owner in order to help the decision-making process from the very beginning. It should help dictate the kinds of companies in which you'll invest.

    @ETPNole1: Thanks! A lot depends on how old a child we're talking about. Young enough for a piggy-bank? That can be a very effective way to demonstrate a way to keep your money safe. Then when the time comes and it's full you can open a savings account. If they are older, then I think it's all about educating them as to where your money goes during the month, the value of a dollar, etc. and then coming up with ways to be aware of how you can budget to save (or at least not waste money). Teach the concept of "pay yourself first."

    @Tomohawk52: I think a lot of people have felt that way at some point. And Starbucks has simply blown that notion out of the water. It's now the norm, not the exception. Bottom line though is you should only invest in companies you feel comfortable with for the long-haul. Thanks; I'm glad you liked the article.

  • Report this Comment On August 08, 2013, at 6:49 PM, cmalek wrote:

    On the other hand all the other coffee shops will wake up one morning and say "We can charge WHAT for a cup of fricking coffee?!" and raise their prices to match SBUX. :)

  • Report this Comment On August 08, 2013, at 11:41 PM, enginear wrote:

    I think the stock market is a dangerous place that IS rigged against you, if you go into it with no idea of what its doing or what its for, and there are an awful lot of people in that situation... I dare say many (if not most) Fools were that way once.

    How do we learn is the question. There will be some desire to make money initially. Some people just don't care. Of course everyone wants 'more money', but some don't want to 'make' money. Motivation needs to drive it all.

    To many (most?) people looking at financial reports, and understanding such things as regression to the mean is just flat too boring to spend their time on. They'd rather go dancing or drinking or driving fast cars. That's OK, and it can all be done with wage/salary type earnings.

    Sometimes I think people have, or don't have the saving gene. a hard thing to 'teach' I think, but worth trying.

  • Report this Comment On August 09, 2013, at 9:13 AM, TMFJMo wrote:

    "I think the stock market is a dangerous place that IS rigged against you'

    @enginear: Well, we're obviously going to disagree on this point, but your points about motivation, learning and saving I think make a lot of sense. Learning is the key to it all and that's why The Motley Fool exists really. No motivation, well then why do anything at all, right? I can't tell anyone to be motivated; they'll have to reach that point on their own. But I'd say that if you're motivated and want to learn, the stock market is an amazing way to grow wealth over long periods of time. And for many individual stocks are NOT the answer. Regular saving and index funds would make more sense along with taking advantage of your employer's retirement plan (if they have one). Savings accounts and CDs certainly aren't going to do it; at least not on their own.

    Everybody gets to make their choices in life for sure. And many would, as you say, just rather go dancing or drinking or driving fast cars. And that's fine too. But I also don't have much sympathy when at the end of the day they've got nothing to show for it all. And that's the point really. Saving and investing needs to be a lifelong endeavor. The earlier you start, the better your chances of being able to live your life (for the most part at least) on your own terms instead of relying on or hoping for handouts.

  • Report this Comment On August 10, 2013, at 12:35 PM, jrj90620 wrote:

    Great article.Instead of buying stocks,people should become minority owners of companies.Totally different way of thinking.One is short term thinking and gambling,while the other is investing.

  • Report this Comment On August 11, 2013, at 11:07 AM, TMFJMo wrote:

    @jrj90620: Thanks! And well-said...I agree.

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