Professional Documents
Culture Documents
Mrs. Pitts told me that you are learning about rates of return in class this
year. In my job as an investor, this is all we think about.
Our job is to grow or compound our clients money at the highest rate
that is safely possible.
Let me show you why Einstein called compound interest the most
powerful force in the universe.
There's a famous legend about the origin of chess that goes like this.
When the inventor of the game showed it to the emperor, he was so
impressed by the new game, that he let the man name his own reward!
Think about that for a second. What would you have asked for? Anything
is fair game.
He did better than that. He only asked for one grain of rice on the first
square of the chessboard, followed by two grains on the next square,
four on the next, eight on the next and so on for all 64 squares on the
board. So each square would have double the number of grains as the
square before. Got it?
Seems like a pretty simple request right? The emperor probably thought
he got off easy and wondered why the man had asked for such a small
reward. But after a week, he realized how wrong he was! Watch this:
https://www.youtube.com/watch?v=t3d0Y-JpRRg
Anyone care to guess how much rice the emperor would have put on the
board?
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When Mrs. Pavese and I first met, she thought my job was just doing this.
She told people I did math for work.
Truth be told, I do do math a lot. Investing requires a good grasp on
basic math skills.
But I actually spend most of my time doing this.
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Anyone want to guess what Im reading about all the time? No Mrs. Pavese. Its not
lemonade stands. But I do spend most of my time reading about businesses and
asking questions. If you are curious by nature, this might be the perfect place for you.
How many of you had a lemonade stand as a kid?
Lets think about that lemonade stand we had as kids for a minute or two. What
might we want to know about it? Maybe things like:
Whats their recipe? Is there a secret sauce? Is it better/sweeter than other
lemonade?
Where do they get their lemons? How much do they cost? How many drinks can
we make from one lemon?
Whats stopping someone else from making the same drinks? Are there lots of
other kids on the block selling lemonade?
Is their lemonade better? Are their glasses bigger? Are they selling it cheaper?
Maybe we should consider partnering with them?
Why should be people buy our lemonade instead of others? Where should we put
our stand? Is there a lot of traffic on the street?
These are some of the things we ask ourselves when researching a company. There
are many more, but its always helpful to keep things very simple. Lets take a look at
another simple business model.
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Mrs. Pavese tells me that you guys arent allowed to chew gum in school.
Is that right?
Okay . . . So maybe this wasnt the best example I could have chosen, but
stick with me here, and please dont try this at Jacobs Fork!
Question: Ever notice that when you open a pack of gum in class, how
quickly everyone becomes your friend?
Assuming gum was permitted in school, this would be a great business,
right?
So lets take a look at our imaginary gum business.
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Its a simple business, but it works. Jason buys four or five packs of gum
each day for 25 cents each.
Once he gets to school, he sells each stick of gum to his friends for 25
cents.
Thats five sticks at 25 cents so Jason rakes in $1.25 on each pack.
That means he is making $1 of pure profit on every pack!
At four or five packs a day, thats a lot of money!
Lets think about this for a second.
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How much do you think Jason can make by the end of high school?
If he sells four packs a day, thats $4 times five days a week, so $20 per
week.
Lets say theres 36 weeks of school in a year. I know. Depressing, but
thats $720 a year. Not bad.
If he started in 7th grade, he has six years left until graduation, so $720
per year for six years turns into over $4,000!
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Now, what if I told you that our friend, The Bubble King, wanted to sell
you half of his gum business. How much would you pay him for it?
In other words, hell share half his profits with you until he graduates,
but he wants you to give him the money today.
How much would you give him?
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Lets think about this together. Hes selling 4-5 packs a day now, right?
But what if Jason doesnt sell that many every day? What if he just sells 3
packs?
Thats still $3 a day or $15 per week. Thats over $500 per year ($15 x 36
weeks).
With six more years of school, we still make $3,000 ($500 x 6 years) by
graduation.
So you would you give him half that today - $1500 - for half the profits?
Is that a good deal?
Lets weigh the pros and cons.
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You guys are smart so about now youre probably asking why someone might sell us
something for less than its worth? Thats a very good question. Im glad you asked.
It turns out that the stock market is a very emotional place. Lets imagine that one of
our partners in the gum business, named Mr. Market, offers to buy our business or
sell us his half of it every single day. Most of the time his numbers are in the right ball
park. But occasionally hes in a great mood and offers us way too much money. And if
he wanted to pay us $5K for our half of the gum business, wed have no problem
selling it to him, because we know its worth somewhere b/t $1 and $1500 right?
So some days Mr. Market is skipping around Wall Street, but other days he can be
very depressed or really nervous about how much gum were going to sell. Maybe
someone found a needle in some Halloween gum or something. Do Moms still even
say that by the way? Whatever the reason, he occasionally gets scared, panics and is
in a rush to sell his half of the gum business back to us at any price. This is when we
hope to buy it for $1 right? Because we know thats a great price!
People act differently in a crowd than when they are by themselves. You probably see
it all the time in school. We see it in the stock market too. Heres your last test of
the day. Tell me which of these lines on the right is the same length as the one on
the left. How many think 1? 2? 3? Would you still have said 2 if everyone around
you answered 3?
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How many of you have been to Carowinds? Pretty cool right. We actually own stock
in the company. They have amusement parks all over the country.
Its a business we can understand. Its a good business, because no matter how good
or bad things are, people can usually afford to take their kids to the local amusement
park. And kids spend a good bit of money on stuff while they are there.
We also own SeaWorld, which is a very similar business. The nice thing about
amusement parks is we know theyll probably always be around. You might see a
scary headline in the news about some of them from time to time but these things
pass and people eventually come back to the parks. Remember what I told you about
Mr. Market. Occasionally he gets spooked by parks closing or by killer whales and
that gives us a chance to buy a good company at a great price.
Thats a good rule of thumb when investing. When I buy stock for our son Lucca, I
want to make sure that he owns something that will be around when hes my age so
that it can compound over all those years.
Just keep in mind how quickly all that rice piled up.
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