3 Thing 1-09

Thing One If I Had Known Then After reading in the Wall Street Journal about Michael Malekzadeh, the self described sneakerhead (ask a kid what that is if you don’t know) who built a $300 million sneaker empire which turned out to be a Ponzi scheme, I was reminded about the revelation I had about my first purchase (with my own money) of an expensive pair of Nike basketball shoes. I bought them for $100 when I was a senior in high school. They were a pair of white leather high tops trimmed in blue and black called Revolutions. Nike had a big ad campaign around the shoes featuring the Beatles’ song of the same name. I loved those shoes and wore them every day. They were my school shoes and may play shoes. But after about a year, they were only fit to cut grass in. They weren't completely worthless, but they were close to it and getting closer each time I cranked up the lawn mower. At the time I bought my Revolutions, Nike's stock price was around $.37/share (adjusted for the seven 2-for-one splits that have happened between then and now). Had I bought $100 worth of stock in 1988 instead of 1 pair of shoes and held that stock until this week, when the price closed at $124.53, I would have around $33,000 to show for my original purchase (not counting dividends) instead of, well, nothing. The compound annual growth rate (CAGR) of Nike over that period of time was around 18.66%. I shared all this with my kids. Of course there are lots of details yet to be grasped, but they understood the essence. To hammer the point home though, I told them that if they each took $220 (the retail price for a pair of the most coveted Air Jordan basketball shoes - which you can rarely get at that price) and bought Nike stock with it today and held on to it for 34 years and we assumed the same CAGR, their $220 would be worth somewhere around $74,000 (thanks to the magical rule of 72). They both laughed in amazement. Then my daughter said, "But I don't wan't to spend all my money on stock." To which I replied, "you wouldn't be spending it, you'd be investing it and it would always be there, available to you and growing, unless Nike went out of business”. To which she flatly replied, "Nike is not going out of business." I smiled and said, "now you're getting it." I wish I’d had a my revelation in 1988. If I had, I wouldn’t have bought my Revolutions. But I didn't know what investing was, and I didn't know what compound interest was, and I didn't know what a retirement account was and, sadly, I didn't know anybody who did. You all do though. So be sure to pass the knowledge on or, at the very least, tell them about us so we can do it.

Thing Two If Shoes Were Marshmallows The following is an excerpt from an article written several years ago by Arthur C. Brooks and it is the perfect companion to the post above about investing versus consuming: "....There is a tremendous amount of research on the links among success, character and the ability to sacrifice. It all reaches the same conclusion: People who cannot defer current gratification tend to fail, and sacrifice itself is part of entrepreneurial success. In one famous study from 1972, Stanford psychologist Walter Mischel concocted an ingenious experiment involving young children and a bag of marshmallows. He put a marshmallow on the table and told each child that if he (or she) could wait 15 minutes to eat it, he would get a second one as a reward. About two-thirds of the kids failed the experiment. Some gave in immediately and gobbled up the marshmallow; videotape shows others in agony, trying to discipline themselves—some even banging their little heads on the table. But the most interesting results from that study came years later. Researchers followed up on the children to see how their lives were turning out. The kids who didn't take the marshmallow had average SAT scores 210 points higher than the kids who ate it immediately. They were less likely to drop out of college, made far more money, were less likely to go to jail, and suffered from fewer drug and alcohol problems…” Since we now know there’s empirical evidence that supports the idea that holding off gratification (i.e. not buying a $220 pair of basketball shoes and investing the money instead) is something that 67% of us likely won’t do, we can remind ourselves not to be such harsh critics but rather gentle helpers of people who need a nudge. When you find yourself hesitant to provide the helpful nudge, use this as a reminder to yourself (and evidence to them) that the results of resisting will leave them orders of magnitude better off both financially and generally.

Thing Three Just A Thought “Non nobis solum nati sumus. (Not for ourselves alone are we born.)” ― Marcus Tullius Cicero