About two and a half years ago, my then-11-year-old daughter asked me what I was doing when I “wrote those articles”. I told her about the stock market and suggested we pick some companies for her pretend portfolio.
Pretend portfolio … words I rue to this day, because her choices have blown away my own and the broad market. I don’t want to ever say I’m jealous of my child, but looking at the performance of her picks compared to mine, I’m jealous.
But perhaps I shouldn’t be too surprised, considering a group of 6th-graders recently demolished college students with their stock-picking prowess.
I thought it would be fun and educational to tell you which stocks she selected, why she picked them and the subtext of her reasoning. Mind you, this is hardly what I’d call “due diligence”, but there is truth in a child’s words, and the point is to take what they say in regards to investments and use it as a jumping-off point for further research.
(Note: Performances are since Nov. 11, 2011.)
#1 — Apple (AAPL)
Apple (AAPL) performance: +30%
Reason: “Your iPhone is so cool, and every time you use that PC-thing that isn’t a Mac, you get mad at it”.
Subtext: Dad prefers Apple products over PCs, and the iPhone seems to accomplish lots of things.
More research because: This gets to the heart of a cultural phenomenon that Apple has created by virtue of its branding and product line.
#2 — Disney (DIS)
Disney (DIS) performance: +127%
Reason: “Like, everything in our house is Disney. All my stuffed animals, all our DVDs, and we watch Disney Channel all day and night, and my friends take Disney cruises and love them”.
Subtext: Disney makes lots of quality products that speak to me as a kid.
More research because: Disney has been a ubiquitous part of childhood for decades. It has only expanded since then with the purchases of Marvel, Pixar and Lucasfilm. It has broad diversity across entertainment, so if you’re an adult, you may know it owns ABC and ESPN among many other things.
#3 — Starbucks (SBUX)
Starbucks (SBUX) performance: +61%
Reason: “Dad, all you ever say is, ‘Hold on, I want to run into Starbucks and get my coffee.’”
Subtext: I see Dad use this product a lot. He must like it.
More research because: Perfect child’s observation of addictive behavior. You want to buy stocks that sell addictive products. But get this — I don’t even like Starbucks all that much. It’s just convenient.
#4 — Amazon (AMZN)
Amazon (AMZN) performance: +50%
Reason: “We never go to a store anymore to buy stuff”.
Subtext: No subtext. She nailed it.
More research because: The brick-and-mortar business of retail is dying. The convenience and pricing of Amazon just can’t be beat. They must be on to something.
#5 — Ashford Hospitality Trust (AHT)
Stock: Ashford Hospitality Trust (AHT); up 27%
Reason: “You keep writing about it”.
Subtext: Go with what you know.
More research because: There are certain go-to stocks that I write about because I understand both the macro business and that particular company really well. Buy what you know.
#6 — Google (GOOG)
Google (GOOG) performance: +86%
Reason: “Nobody says ‘I’ll search for it’. They say, ‘I’ll Google it’”.
Subtext: When a company’s flagship product becomes part of the vernacular, it can’t be ignored.
More research because: You have to be living under a rock to not know Google is taking over the world, or at least has its hands in so many aspects of everyday life that it’s filming your driveway as it drives by in that stupid car.
#7 — McDonald’s (MCD)
McDonald’s (MCD) performance: +5%
Reason: “We eat there a lot, so do my friends, and your cousins own a bunch of stores”.
Subtext: My peers use the product, so do I, and your cousins own stores because it must be a good business for them. Plus, they’re cool.
More research because: Similar to Starbucks, the ubiquity of the product suggests a successful operation. It’s a product every American is aware of, as are many people in many foreign countries.
Conclusion
Two other stocks — Virgin Media and Chuck E. Cheese — were bought out for close to twice what she “paid”. The former she chose because her phone was on the Virgin plan and the latter because we’d spent many an hour there when she was growing up.
Overall, returns no manager could ever match. An equally-weighted portfolio of those seven stocks would have gained roughly 55% now, beating the S&P 500 by almost 10 percentage points — not including the two buyouts.
The lesson here is that the reasons to buy a stock should ultimately arise from a very simple thesis — so easy that a child can proffer it.
Lawrence Meyers owns shares of AMZN, DIS, AHT, and AAPL.
