Roughly a year after the highly publicized incident, Ralph Baker Jr. stands before a small crowd talking about Don Imus and the Rutgers University women’s basketball team. But this isn’t a discussion about race or propriety–instead the focus is on the future of radio. “If satellite radio was ‘all that,’ Don Imus would have gone to satellite radio,†says Baker arguing against investing in either Sirius or XM. “True,†replies a young man, nodding his head in approval. Baker, a director in the New York City office of business advisory firm FTI Consulting, isn’t speaking to investment bankers. His audience is comprised mostly of 12- and 13-year-old boys, who are there to decide what stocks to purchase next.
They are members of the New York Shock Exchange, a youth program that combines sports and business by teaching kids about basketball and investing–roundball and round lots, which are the standard units of trading securities, usually equaling 100 shares of stock. Founded by Baker, the group holds periodic investment meetings with students who also travel around the New York tri-state area competing in Amateur Athletic Union basketball games.
Teaching children about finances–and starting early–is critical. With part-time work, teens are earning an average annual income of $2,634, according to a 2007 study conducted by research services firm The Harrison Group, based in Waterbury, Connecticut. Tack on an additional $5,496 of mom and dad’s money that young people burn through every year, and the total spending power of teens is $216.3 billion. But how many teens are equipped with the financial skills to budget, save, and invest the dollars they are pocketing? If the behavior of college students is any indicator, not many: Among college seniors, 56%carry four or more credit cards and have an average total balance of $2,864, according to student loan lender Nellie Mae.
Parents should start planting the financial seed with children early on, says Tom Henske, a partner at Lenox Advisors, a New York City-based financial advisory firm. “That’s when people are most motivated and that’s when you have to lay the foundation for all the planning,†says Henske, who heads Lenox’s Money-Smart Kids program. “Start by creating a money constitution–an agreement in writing between husband and wife that acts as a corporate mission statement.†Sit down with your partner and agree on your money values, he adds. It is a task for parents because most schools aren’t teaching students about personal finance. According to the National Council on Economic Education, only seven states require that high school students take a personal finance course to graduate.
Baker created the New York Shock Exchange to empower his only son, Ralph Baker III, and other teenagers, with the financial knowledge necessary to succeed in life. “It’s really a life skill,†says Baker, an animated 41-year-old, who is just as passionate about sports as he is about investing. “Companies aren’t responsible for [their employees] anymore; saving for retirement is your responsibility.†Determined to start a basketball team that could also help young men learn about investing, Baker began recruiting players from his son’s recreational basketball league. At first, parents were skeptical. “They were wondering if I was serious or not,†says the single dad who lives with his son in Brooklyn, New York. “They asked me how the process was going to work, where were we going to travel to, how was I going to teach them about investing.†Even Ralph III was cynical. “When I told my son I was starting the New York Shock Exchange, he said it was the dumbest name he had ever heard and said he wasn’t going to play,†laughs Baker. The Shock Exchange, organized as a 501(c)3 nonprofit, played its first game in the summer of 2006 with eight players on the team.
Marilyn Weaver Fox and her husband, Colin Fox, wanted their son Garrett, 13, to learn how to invest and save. “Because I’m an entrepreneur, I immediately wanted Garrett to be a part of this team,†says Colin. His wife adds: “To be on a team with an investment component teaches him finance management–and that is applicable no matter what he does.†She also says that Garrett and his friends now follow stocks together. “He is very interested in how to invest and what investments are more lucrative than the next.â€
“The goal is to provide the students with information about investing that they can process,†says Shock Exchange board member David Neverson, an associate at ICV Capital Partners L.L.C. in New York City (No. 7 on the BE PRIVATE EQUITY FIRMS list with $443million in capital under management). “We’re helping them think logically about investing in a company.†At the first formal investment meeting of the Shock Exchange in July 2006, the team–currently comprised of nine students–decided to invest in Apple Inc. and video game retailer GameStop Corp. The priority of the program is not for students to make a profit from the investments, but rather to learn the basics of investing. For the first venture, Baker put up $900 of his own money–$300 in each company, plus another $300 in Baker’s pick, life insurance provider Phoenix Companies Inc.–so the kids could track the stocks’ performance. A year later, Apple shares had posted returns of 112%, GameStop brought back 82%, and Phoenix Companies fell just 1%. The younger Ralph says the team decided to invest in Apple because the kids saw its products being used everywhere. “Everyone you see is listening to iPods,†says the savvy 13-year-old. His father spells it out. “A lot of kids in New York think they’re hustlers. If you are a real hustler or someone who is real savvy, instead of wearing the hottest trend, why not invest in the hottest trend?†asks Baker. “That’s really the whole point of this. The kids Know what the hottest trends are. I don’t. Why not say, ‘Hey, this is what everybody is buying.’ Why not look up the stock?â€
When choosing stocks, Baker and the other board members make sure the students perform the necessary due diligence. The students are encouraged to research companies they are familiar with. At the formal meetings, Baker provides the kids with analyst reports on the stocks. Based on the research–and what the students already know about the companies–the team members are asked to defend stocks. This includes breaking down why they think the company will do well, calculating the price-to-earnings ratio and the earnings growth rate, examining the company’s competition, and determining what risks would be associated with investing in each company. To help the kids learn these concepts, the board members relate them to what the youngsters know best: basketball.
At the most recent meeting, Neverson explained price-to-earnings ratio using the salaries of two pro ballplayers, Michael Redd of the Milwaukee Bucks and Dwyane Wade of the Miami Heat.
“[In 2006] Redd scored 1,416 points and Wade scored 1,397,†said Neverson. “If you divide their salary [adjusted for the number of games each played] by the total points they scored, Redd is at $6,053 [per point] and Wade is at $1,710. So, basically, this is saying that Michael Redd is earning a lot more relative to Dwyane Wade. Is that fair?†Some of the students say yes, while others say no.“The point is that Wade is a much cheaper player to have on the Team because not only are you paying less, but he adds the same value to the team. As an investor, you want to make sure you’re getting value for your stocks.†Henske of the Money-Smart Kids program says, “You’ve got to be able to relate this stuff to things that kids get, and if basketball is what these kids understand, then I can’t think of a better way to teach them about money.†Baker also created a glossary of terms he dubbed “shockisms†that help make investing relatable to students. The terms have triple meanings–one in business, one on the court, and one in the real world. F
or example, in business, a “mullet†is a person who consistently makes bad investments. On the court, it is someone who always tries to do what he is incapable of. In the real world, it’s “a dumb fish†that lies on the bottom of the ocean waiting to eat fish that swim into its open mouth. Peter Bielagus, a financial coach for young people, says the idea of “shockisms†is terrific.“Parents and teachers often start out with what kids should do, when they should be starting out with what kids will do,†says Bielagus. “Do they love finance? Mmm, not really. But they do love basketball, so they will understand basketball, and they will understand terms that are like basketball terms.†Out of the four basketball teams he’s played on, Demetrie Martelly says the Shock Exchange is his favorite. “It’s pretty interesting,†says the 14-year-old, who was adamant about investing in clothing designer Prada at a previous investment meeting.”Coach Baker introduced me to stocks and investing and I really got into it.†At the most recent investment meeting, Baker, Neverson, and board member Keith Barksdale, a partner at Third Ridge Capital, a New York City-based hedge fund and private equity investment firm, gave handouts to the kids explaining the current state of the economy. “Home prices have fallen significantly across the country. Banks have less liquidity. Job losses have increased,†reads the material. Some of the students’ eyes glaze over the handouts as Baker explains what this all means. “When people feel optimistic about the future, they are going to spend a lot more,†said Baker. The three further explained that companies are seeing lower sales and profits, which negatively affects their growth. By the end of the meeting, the group decided to stick with Apple and GameStop, and also to begin investing in Johnson & Johnson, a company previously discussed as a possible investment.
Although the Shock Exchange uses investing as its primary focus, there are many other ways to teach kids about finances. Andrea Mills, founder of Simply Outrageous Youth, a Philadelphia-based nonprofit, says there are three ways to educate young people about financial literacy. The first is to use real-life experiences, which include taking your child to the ATM to withdraw money or to the car dealership when you purchase a car. The second is playing games that involve money, such as Monopoly, Payday, and The Game of Life. And the third is to help kids start their own business. “Empower kids and teach them how to make their own money,†says Mills. A few days following the latest investment meeting, Baker and his son are up early. By 6:15 a.m., they’re on their way to a big weekend tournament. It’s a fundraiser at The City College of New York featuring 36 basketball teams from all over the East Coast. By 10 a.m., the Shock Exchange and the Maryland Ruff Riders are awaiting tip off. At roughly 6′ 3â€, the Maryland team’s tallest player towers over the New York Shock Exchange. When the halftime horn blows, things don’t look good.
During the break the players get some guidance from Baker, who speaks about playing better as a team and passing the ball to the first open man. After his spiel, the team huddles together and puts their hands in the center of the circle: “One. Two. Three. Shock Exchange!†They didn’t win the game that day; the final score was 30 to 14. But perhaps the bigger lesson is never giving up. Not in the boardroom. This team is catching on. Even though they were unevenly matched, they didn’t quit. “We’re going to try and learn from this,†says Ralph III after the game. “We know we need to come back and do something.â€
The path to financial literacy starts early. Here are some activities to point your kids in the right direction:
1.   Understanding the concept of money is the first step. Start by explaining that you go to work for eight hours every day in order to pay for your home, food, and by all means, toys.
2.    Piggy banks are a great way to teach budgeting. For instance, Money Savvy Generation, www.msgen.com, offers a piggy bank that has four chambers: save, spend, donate, and invest. Teach your child what the categories mean, and explain what percentage of her money should go into each.
3.   Grocery shopping can be made into a finance game. At the register have your kids guess the total bill. As they get a little older, share your grocery list and budget in order to help them learn how you stay within your means. Making choices is a big part of personal finance.
4.    When the family is out to dinner, let your child choose whether he would like a soda or water with his meal. If he chooses water, explain that you’ll give him the money you would have spent on the soda. If he chooses soda, he forfeits the cash.
5.   Understanding the concept of money is the first step. Start by explaining that you go to work for eight hours every day in order to pay for your home, food, and by all means, toys.
6.   A prepaid debit card can be an essential tool to teach budgeting and credit, because an all cash allowance can be impractical. Each week, fill the card with a set dollar amount and have your child manage the money
7.   Encourage your kids to save by promising to match every dollar they put away. For example, if they deposit $40 into a savings account, tell them you will add an additional $40 into their account. If that price is too high, you can match some lesser percentage as an incentive.
8.    Visit a local bank branch and have your child open an account. Start younger kids with a passbook savings account. As they move toward high school, make sure they have a debit card and open a checking account. When kids start to work part time, this exposure may help them avoid problems.
9.   Following a company’s stock will help your middle schooler understand the basics of the stock market. Choosing a company he can relate to, such as Disney or DreamWorks Animation SKG will make tracking the stock’s performance more engaging. Help older kids buy actual shares to understand the reality of investing.
10.   Starting a business is one of the best ways for your child to learn about money matters. Have her come up with a business idea–whether it’s a weekend activity or an online venture–and help her draft a business plan. This will prompt your child to approach you with money questions.
11.    Purchasing a car is a traditional rite of passage. When it’s time to purchase the next family car, take your high schooler along to the dealership. Explain every step of the experience, from test-driving to negotiating, to help him get a jump-start on what to expect.
12.    Understanding credit is critical. Help your child by loaning her money to purchase something she wants but can’t afford. Before buying the item, have her come up with a repayment plan, and make sure she sticks to it. Also consider giving her a credit card linked to your account in case of emergency–early responsibility may help her avoid future pitfalls.
13.    Calculating the tip at restaurants will help your child improve her math skills. Let her practice computing the tip at the end of dinner without using a calculator. As a challenge have her try to calculate a 10% tip, a 15% tip and a 20% tip.
Raising Financial Whiz Kids: Information and Games
Gazillionaire.com: Provides a simulation game that gives kids the chance to build a business
RichKidSmartKid.com: The home of Cashflow for Kids, a computer game that helps kids learn about money and finance in an interactive way
VSE.MarketWatch.com: The Virtual Stock Exchange is a free online trading game that offers access to the resources of MarketWatch.com
YoungInvestor.com: Supplies a plethora of information and games about the stock market
Toys
Ages 3 to 8: Pretend & Play Calculator Cash Register, www.learningresources.com; $39.95
Ages 8 and up: YOUniverse Deluxe ATM Machine comes with a personal ATM card and PIN number. By Summit Products, available at www.amazon.com; $39.98
Entire family: Conversations to Go: The Game that Questions Money, includes 100 questions about money to help spark conversation with your kids. www.moonjar.com; $13.65
Books
Pigs Will Be Pigs: Fun with Math and Money, by Amy Axelrod (Aladdin; $6.99)
Raising Money Smart Kids: What They Need to Know About Money and How to Tell Them, by Janet Bodnar (Kaplan Business; $17.95)
Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money–That the Poor and Middle Class Do Not!, by Robert Kiyosaki with Sharon Lechter (Business
Plus; $16.95)