Show notes
Hey everyone. This is Kirk here again at Option Alpha and welcome back to the daily call. Today, I wanted to offer maybe some options trading advice for teenagers. Now, where this came from is actually from my nephew who came to me and started asking questions about what I did and why I always looked at these funky charts and all this stuff. And so, it was kind of an interesting conversation, nothing that I actually thought would actually happen, but it did. He came to me and said, "What do you do? What are all these charts?" I tried to explain it to him a little bit, but I thought to myself, "Okay. There's probably a need for a little bit of advice maybe from the parenting side to teenagers or to their kids or friends or mentors (whatever you do) that would help out." And so, I wanted to offer some of that now.
In all fairness, my nephew is a self-described preteen, he says because he is not yet 13, he is 12, so he describes himself as a preteen. But this advice is more for people who are kids, who are teenagers who are starting to get interested in the markets. Now, I actually had a little bit of an interest in the markets initially during like the later part of my high school experience. Thankfully, my mom and I… I think I've said this before, but my mom actually took me to a seminar on stock trading and options trading like way back. I mean, this is old-school back in the day and that's where I got one of my first introduction to this entire thing and I just very much gravitated towards it very naturally. I think there's a lot of value to be set in getting kids involved in options trading and just managing their finances and basically, financial literacy as early as possible.
One of the things that I want to do in a later stage of life is start doing more with financial literacy for teenagers and kids. I think that we've done a good job and we're going to continue to focus on adults and people who have investable assets. But one of the things I want to do in the future is start to really focus on again, kids and teenagers and financial literacy. I think there's a huge gap in financial literacy in this country and I'm just baffled by it, like I don't understand why in most cases, school systems and universities teach everyone all this information to get a great job and make all this money, but nothing about how to manage their money or how to navigate the markets. It's like – Okay. You made this money and then just give it away blindly to somebody else. Who knows better? I don't believe in that. I think everyone can make better decisions by themselves and can manage their portfolio just as well or if not, better than somebody else without the fees.
In all of this, some of the advice I would give to teenagers… If you are a teenager and you're thinking about trading or started trading or if you're a parent and you're starting to coach your teenager or coach your son or daughter on trading and finances, I think there's a couple of key things to learn. One is you have to learn expected outcome. I think that's probably one of the biggest things that I would say is relevant for this day and age and even going forward in the future, is looking at the expected outcome of a system, a strategy, a financial model because there's going to be gyrations and what I think people fail to understand now is that when they look at a financial model, everyone's always looking at the initial ups and downs. "How much did I make this month?" versus "How much did I lose last month?" Those numbers could be the same or drastically different. But what's more important than the initial gyrations up or down or even during the entire period is the expected outcome at the end. If I know that my expected outcome is a 10% return, then really, I shouldn't care about the in between.
That's why I think I relate this a lot when I think about kids who are starting and people who are starting early as that whole old concept that we all know about starting to save earlier and basically valuing compound interest. If we start saving earlier, then we have all this money at the end because we started earlier. It's the same thing with expected outcome. If the expected outcome is X, then the earlier you start, the quicker you're going to get to that level because you're going to have more time to increase trade frequency to hit your probabilities, more time for market gyrations to basically trade through. All of that stuff is way more important than starting later on. That's the first thing, expected outcome.
Two is risk management or position size. I still am baffled by why people trade too big, too large. I think the earlier we are able to teach people the importance of trading small positions in whatever they do… I'm not even saying just trading. I'm saying whatever they do as far as investing should be in small positions in multiple different areas or different sectors, investments, so that no one single investment blows up in their face and cripples them. A lot of people still throw all of their money into the stock market and while that's not a bad thing, I think they should have more than just their money in the stock market. Many of you guys know that I'm a real estate investor. I obviously run Option Alpha, so that's another investment that I consider to be an investment. You should have your money in different places. I still am baffled by the fact that a lot of people don't understand this concept. The earlier we can describe it to teenagers and present that information to them, the better off they're going to be. That's one of the other things.
The third thing I would say is consistency and persistence. I think those two things are some of the most important mental concepts that we can teach young people and teenagers in this space, is having the mental fortitude to consistently work at a system, to be persistent in trading or investing or saving, whatever you want to use as your guinea pig for your conversation, but to have the persistence to keep doing that when it feels like you don't want to do it. One of the things that I would definitely say me and my wife did and I'm super proud that we did this is when we got married and even still to this day, I've never had a car payment. I've never bought a new car. I've never even bought a used car and had a car payment. I know that's not possible for people, but for us, we made it possible. A lot of people, a lot of our friends at the time when we got married and we're living in a small condo, everyone bought new cars. They bought new houses, they bought new cars. We knew that that's not what we wanted to do. We knew that we wanted to save, we wanted to invest and that was our focus. We had the persistence and the mental fortitude to not do the things that everyone else was doing because we had the long-term endgame in mind.
That's something I think is lacking in this day and age, is that everyone sees… And in most cases, it is done by the parents and by family members. Everyone's trying to keep up with the Joneses. If somebody else gets a new thing, widget, then everyone else has to get the new thing, widget. We need to teach our young people and our teenagers that you don't have to do that to be successful, that you can have the persistence to keep saving your money and forego those shiny objects that you don't really need right now and will serve you no purpose in the future for something else greater in the future, some higher expected value in the future. One of the things that I learned early on and I think about it now is that if you take anything that you buy right now, it's basically worth five times more in the future, meaning if I buy something for $100 now, what I'm effectively doing by buying something for $100 is giving up $500 of potential value at some point in the future, 10, 20 years from now.
I would relate that back for teenagers. I would say that $20 thing right there could be worth $200 in a couple of years if you just saved your money and invested it or did whatever. So, tying those two things together and making it more of a value proposition to save money or to invest money, do whatever they need to do I think is a better way to go about it. Hopefully this helps out. I don't know. I thought about this today and I was like, "You know what? This is probably something that we could start a whole discussion and thread on." If you have comments on this or if you've started to go through this with your own teenager… My daughters are not teenagers yet, so we are not at that point yet where we have to start having these finance conversations, but eventually they will. Let me know if you have any comments or ideas, suggestions. We'll start a huge thread about this in the forums and on the community. Until next time, happy trading!
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