BusinessWeek Investor: Teen Investing
No Kidding! Teens Are Trading Big-Time
But now it's biotech shares, not baseball cards
Michael Druker is a typical 13-year-old who hangs out with friends and plays basketball, tennis, and golf. But he has one passion he doesn't share with most of his peers. Every morning he wakes up at 6 a.m. to watch an hour of CNBC. At night, he reads analysts' reports and researches stocks on the Web. And at school, the Greenwich (Conn.) resident checks his stocks on his laptop when he can. Once, Druker was so bold as to execute a trade in English class while his classmates were surfing the Net for poems. It was nothing urgent. "I snuck it in," he says, adding that "it's very risky" to trade under a teacher's nose.
If that doesn't sound daring enough, consider this: Although Druker just started eighth grade at Rye Country Day School in Rye, N.Y., he invests thousands of dollars--he won't say exactly how much--for himself, his 22-year-old brother, and his parents. "When I was 10, my dad would check what I was buying for him. But when I was 11 1/2, he started giving me full permission to do trades myself," explains Druker, who says he has earned 10% to 20% a year since his parents allowed him to invest about $4,000 at the tender age of nine.
The stock market isn't just for grown-ups anymore. According to Stein Roe Mutual Funds, about 19% of students in grades 8 to 12 own stocks or bonds, up from 10% in 1993. About 2 million of them are active investors who pick their own stocks, estimates Ginger Thomson, chief executive of DoughNET.com, a financial Web site for teens.GETTING RESPECT. With the bull market making it look easy to become a millionaire, it's no wonder those too young to drive or vote are taking their baby-sitting, birthday, and Bar Mitzvah money and parking it in the stock market. Still, many underage investors have surprisingly modest expectations. "I'm in it for the learning experience," says Bibi Schweitzer, 16. Over the past four years, the Larchmont, N.Y., resident has amassed $7,000 by investing her earnings and allowance in blue chips such as Johnson & Johnson and Cisco Systems. Schweitzer's hobby is one that few teenage girls share. Indeed, as the only girl among 35 members of Mamaroneck High School's investment club, Schweitzer declares, "it was hard getting the respect I deserve."
Thanks to the explosion of online investing, teens are able to call the shots instead of relying on their parents to place trades for them. Although parents must set up custodial accounts for minors, kids who know their accounts' passwords can trade without oversight. Most teen investors say they seek their parents' advice, but not their approval. "Sometimes they agree with what I'm doing, and sometimes they don't. But they give me control," says Aaron Greenspan, 17, of Shaker Heights, Ohio.
Typically, young investors start out by buying shares in companies they know. That's what attracted Schweitzer to McDonald's, Nike, and retailer Delia's. Similarly, when Schweitzer stopped shopping at once-trendy Delia's, she knew it was time to take her profits. She sold the 100 shares she got at 13 a piece as a Christmas gift in 1996 for 27. It's a good thing, since the shares are now at 2 1/2.
Computer-savvy Gen Y investors also favor technology stocks. Since Aaron Greenspan incorporated his software company, Think Computer, two years ago, he has sold $106,000 worth of products, including a program that tracks payroll and other expenses for small businesses. Not surprisingly, when the Shaker Heights High School senior decided to invest $10,000 of Think's cash last year, he purchased computer stocks. His picks: Iomega, NorthPoint Communications, Adobe Systems, and 3Com. "I use their products," he explains.
As Greenspan's portfolio illustrates, the downside of buying what you know is a lack of diversification. Of course, one way to diversify quickly is to buy shares in a mutual fund. But many teens like being in control. "Why pay someone to manage your money when you can do it yourself?" says David Leung, 17, of Palos Verdes Estates, Calif. Indeed, Leung has a better track record than many professional stockpickers. Over the past seven years, he has parlayed gifts and his earnings into a portfolio worth nearly a half million dollars (page 192).
Despite their youth, many teens have sophisticated investment philosophies. Leung looks for stocks with price-earnings ratios not far above their companies' earnings-growth rates. And because trading generates commissions and tax bills, he invests for the long run, which he defines as 10 years. "There's always the possibility that a stock could drop, but if it's a solid company, it will rebound because I'm looking at holding it for 10 years," he explains.
Alastair Rampell, 19, takes a much more aggressive approach. When the Harvard University junior started investing five years ago, his style was buy and hold. But after working at Boca Raton (Fla.) hedge fund Harch Capital Management two summers ago, Rampell started to experiment. "I wouldn't call it day trading, but they were doing a lot of short-term things," he says. A favorite strategy evolved after Rampell noticed that stocks often rise when mentioned on CNBC. At CNBC's Web site, Rampell downloaded future guest lists. "The day before they appeared, I would buy, and the morning they came on, I would sell," he says.
Rampell also tracks fast-moving computer stocks--a group he knows well, thanks to his experience designing software for his four-year-old company, Rampell Software. But rather than buy those stocks, he searches for competitors. His bet is that these stocks will be swept up in the momentum. The strategy worked well in late 1998, when Rampell bought shares in PC Connection after seeing another direct marketer of computer products, Multiple Zones International, surge. Trading at $10 a share, PC Connection had a reasonable price-earnings ratio "and it is a much better company," Rampell says. The stock tripled before he sold.
Rampell also likes to short stocks, or sell borrowed shares in the hope the price will fall before they have to be replaced. Currently, he's betting against software maker VA Linux Systems. He has also borrowed $80,000 to buy stocks "on margin." So far, Rampell has been able to avoid a margin call, or a demand for immediate repayment. "I do take a lot of risks," he concedes. Last year, Rampell made more than 300 trades, generating a $20,000 tax bill on almost $60,000 in earnings.HARD KNOCKS. It's hard to find time to research and trade stocks in a schedule already crowded with homework, after-school activities, and jobs. Rampell took such a heavy course load at Harvard last spring that he didn't have time to keep on top of his investments. In March, Rampell says, his portfolio was worth about $250,000. Now, it is down to $160,000.
Many teen investors learn the hard way. Michael Seltzer, 16, of Woodbridge, Conn., put $500 into each of two computer companies, Adaptec and Symantec, before attending business camp this summer. Right now, he concedes, "they're not doing so well. I need to diversify." And over a year ago, Eric Wexler, 14, of Scarsdale, N.Y., bought two-penny stocks. Diagnostic testmaker Interleukin Genetics has tripled. But search engine Fetchomatic Global Internet has sunk from 3 to about 1. "Before I invest, I've learned to back up [Internet chat] with analyst reports, previous earnings, and press releases."
That's something a lot of adults have yet to learn. By the time today's teen investors grow up, they may have a thing or two to teach Wall Street about the stock market.By Anne TergesenReturn to top