Blue Chip Kids, what every child and parent should know about money, investing, and the stock market. David W. Bianchi. John Wiley & Sons, Hoboken, 2015. 234 pages.
Author David W. Bianchi wrote this book for young people who are interested in spending money. He wrapped the uses of money into 3 important topics: 1) All about money; 2) Ways of investing money; and, 3) Stock markets. Gambling was excluded from the discussion.
I was interested in learning to coach my granddaughter on ways investing money. Bianchi exposed me to very low-, very high-, and mid-range risks of investment (I wouldn’t advise my granddaughter to invest at either end of the spectrum!). Here’s my synopsis:
All about Money. “Rule #1: live within your means”.
Chapter 1 has one of the best sections in the book which describes ways of earning money throughout life. Money is a “currency”. Don’t be surprised to learn that there are many different currencies with constantly changing values. Chapter 2 describes ways of paying for things.
The best ways of borrowing money are discussed in Chapters 9-11. If you want to avoid a penalty, repay your debt on time. Payments of interest on loans are called coupons. Coupons are a cost to the borrower that are paid to the lender. Some borrowers must pay simple interest and others pay compound interest. Lenders usually prefer payments of compound interest.
Borrowers are expected to show that they are reliable (“credit worthy”) people. For example, bankers will ask to read your financial statement before giving you a loan. Your financial statement is a document that lists the total value of assets (things that you own) and liabilities (money that you owe). The difference between total assets and total liabilities is your net worth.
Governments earn money by charging taxes and selling bonds. Everybody has to pay taxes. Failure to pay any of the many taxes described in chapter 12 may lead to a government audit and penalty. Chapter 13 reveals that the U.S. Government owes 17 trillion dollars to lenders from around the world! All of us face serious consequences if our government fails to pay its debts! Meanwhile, we can protect our personal financial reputations by avoiding default and bankruptcy. Better yet, don’t borrow money. Create a budget to “live within your means”.
Chapter 15 explains the challenge of retirement, which is to continue paying bills after you stop working for a living! After you graduate from school to begin a career in early life, start saving for retirement later in life at age 60-75 years. The author wisely advises to “give yourself the ability to retire if you want to”. Your retirement income will come from retirement savings, social security, pension plans, and annuities.
Investing is all about risk and return. Treasury bonds are considered no-risk investments that return about 3% annually. The investment choices that Bianchi offered to his readers were stocks (chapters 3,8), options (chapter 5), funds (chapter 6), bonds (chapter 7), and private companies (chapter 14).
A Stock is a certificate of ownership, also called a security. Brokers don’t issue the certificate, they send a confirmation that serves as evidence of ownership. The market value of the stock usually rises when its company earns profits.
Options are contracts that guarantee the trade of an asset at a fixed price for a limited period of time. The seller earns a fee for guaranteeing the trade. The buyer pays the fee in turn for the right to execute the trade before expiration. The buyer may benefit by 1) using the option as an insurance policy, 2) exercising the option at a favorable price, or 3) trading the option in the options market.
A Fund is a pool of money collected from many investors to invest in a group of assets. The advantages of the fund are that investors don’t spend considerable time doing research and don’t spend large sums of money for a diversified portfolio. Among the types of funds are
- Index funds, which copy a security index and charge low fees for the service.
- Mutual funds, which don’t copy a security index and do charge several fees for the service.
- Hedge funds, which invest in anything and charge very high fees. Hedge funds have strict rules of eligibility and charge “2 and 20” fees (2% annual management fee and 20% management ‘tax’ on investment returns).
A Bond shows that you lent money to the company on condition that it returns the money, with interest, at the maturity date. The bond’s face value is the original price (printed on the face of the bond); it is the redeemable amount! The yield is the bond’s annual rate of return; Yield = Interest / Price.
A Private Company does not trade its stock in a public stock exchange. Private company stocks are illiquid because they don’t have an open market. Venture Capital and Private Equity firms buy stocks in private companies. Venture Capital is money invested in start-up companies. Private Equity firms inject money into established private companies in exchange for the companies’ stocks.
Advice: It’s difficult to predict the ‘top’ and ‘bottom’ of market prices. Do homework to buy quality stocks at a reasonable price.
Chapter 3 explains that the stock market is a place for orderly buying and selling of stocks (and other securities). There are many stock markets that vary according to listed stocks and total market capitalization (‘market cap’ is the total value of the company’s shares). Chapter 8 describes how to make stock-buying decisions, how to participate in the stock market, and how the market behaves. David W. Bianchi, if I misread your book, then I apologize for citing 2 nearly insignificant errors that were made about investing in stocks:
- Contrary to statement, there is no P/E ratio = 0. Ratios of x/0 are undefined. Financial websites don’t report the P/E as a number when company earnings are negative or 0.
- A share buyback doesn’t raise the price per share of stocks; only trading activity in the market can raise the price. A share buyback raises the earnings per share (eps), which then may raise the share price.
I believe your book is well worth reading.