Rule Breaker Portfolio
Response to the Lamonts
By Dale Hollingshead (aka ReaganSpicy)
April 12, 2001
Dear Ian, Hannah and Jacob,
I was very impressed with your business. You are thinking about your target market, what your customers want to buy, and how to learn from things that didn't go right with your ideas. It's very important to keep asking yourself what's working and not working, and what can you do to do it better the next time.
I have four kids myself. My oldest is only 10, and they're just starting to think about some of the things you're doing right now, including investing. I like to invest in growing companies, and I also help companies make decisions about their future for a living. You are asking many of the same questions as my kids, so I'd like to offer a few ideas that may help you:
- You need to decide first what you want your business to look like next year. If you want your business to continue, you have to set aside enough money to cover your expenses so you don't have to borrow any money. Some business owners don't manage their cash flow properly, and run out of cash just when their business is starting to grow rapidly. While borrowing money is sometimes a good idea, it's always better to avoid it if you can. Try the following:
- Decide how many puppets or Nutcrackers you think you can sell at your next show, based on how quickly you sold them this last time, and how many people wanted more after you sold all you had.
- Make a list of all of the materials you will need, and add up the total cost of those items.
- You may want to add how much you need to spend for marketing (letting your customers know you are selling the puppets, like copying and handing out fliers, or renting a booth at the festival).
- The total of all that amount of money should stay in your account, earning interest until you need it � you don't want to invest that in stocks because it may not be all there when you need to spend it.
- For some of the money that's left, let's say $10 or so, you should split between the three of you. Use the money to buy something fun to celebrate your success � maybe go to Chuck E. Cheese or Toys R Us. Lots of adults work very hard for their money, but don't always get to enjoy it. You've accomplished something pretty neat, and it's ok to spend a little of your profits on fun stuff.
- You don't have to do this next one, but you might also give a little of the money away. Some people give to their church, others give to the library, or go plant a tree, or donate it to a homeless shelter or charity. It won't help your business, but it will make you feel good that you're making someone else's life a little better.
- For whatever is left over (maybe $20-30), this is money you can invest. The simplest thing to do is put the money in an index fund, because you can buy any amount and not have to worry about the number of shares. Each time you do a show, you can add more to this account.
- As you do this over and over again, your investment fund will grow. Once you have a few hundred dollars, then you can start looking at individual stocks if you want. You have to be very careful, however. You've already started thinking about the right things, companies and products that you know and use. Just because you like their products doesn't make it a good investment � you have to do some research before you invest. Some things to look at include:
- Has the company's sales and profits been growing or shrinking? A good company would keep growing both every year. Just like your business � if you sell $100 this year, then $200 next year, then $300 the year after that, and you have more and more money left over in profits each time, then you're doing the right things.
- Does the company have a vision for the future? Can you tell from their website, their commercials, and their other marketing materials (including their annual report, which has a letter from the company's boss or owner that explains what they're thinking about). This is like you deciding now that you're going to concentrate on Nutcrackers next year because that was your best seller last year, and you know you can sell twice as many next year because everyone wanted to buy more after you ran out. This is called a forecast. And if your forecast is right, you can branch out the next year into Sugar Plum Fairies for the girls and Mice Kings for the boys. This is called a business plan, and all successful companies usually have one.
- Does the owner or manager of the company have the right background and know what he/she's doing? It's very hard for a vegetable farmer to do a good job making and selling Nutcrackers if he doesn't know anything about Nutcrackers, has never played with one, doesn't even know what they look like, because he's spent all of his life on the farm. But if she hired someone who is a professional Nutcracker maker, she's a smart manager.
Investing can be a lot of fun when you've worked hard, made smart decisions, and can watch the value grow over the years. Especially when you plan with a long-term goal in mind, like maybe buying a new bike, or eventually a new car, or maybe even for college or your own home. Once you've achieved your goals through your own efforts, it will mean that much more to you.
Good luck, and most importantly, have fun!
Dale Hollingshead (aka ReaganSpicy)
dhollingshead@scpartners.com
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