Why You Need to Invest Like a Kid

In 1990, an energetic band of 12-year old kids were inspired to create a portfolio of stocks by their teacher at the St. Agnes school in Arlington, Massachusetts. Investing maestro Peter Lynch detailed their story in his book Beating the Street.

In two years, the results surprised many as the St. Agnes portfolio of stocks went on to produce a 70% gain, easily outpacing the 26% gain by the US market barometer, the S&P 500 in the same period. In fact, their results were good enough to beat 99% of all mutual funds in the US for that timeframe.

The miracle of St. Agnes, and why it matters to you

Now, before you rush off to hand over your hard earned cash to your kids, we should try to glean lessons from their success. Luckily, Lynch is a step ahead of us. You see, the kids of St. Agnes sent Lynch a large scrapbook of their top-rated stock selections, and drew pictures of each one. This experience led the investing maestro to come up with the quote below:

Can you illustrate your investing idea with a crayon?

The underlying lesson in this story is that we should keep our investment ideas simple enough to understand. If possible, even simple enough to draw with a crayon. If we are not able to explain the business behind our investment idea, it could mean that our own understanding of the investment might not be as good as we think.

As an example, take food catering provider Neo Group Ltd (SGX: 5UJ). Neo Group is also the company behind the Umisushi stores which provides sushi and bento sets. A stroll down to a nearby MRT may reveal that the sushi stores tends to cater for take away orders as well as minimal sit down dining. Its offerings would differ from the dining experience at say, Sakae Sushi outlets, which is owned by Sakae Holdings Ltd (SGX: 5DO).

From this little walkabout, the Foolish investor should be able to see the benefits that Umisushi offers: Convenience. You can easily pick up sushi at the MRT on your way home from work, for instance. To add to that, Neo Group’s competitors should be easy to identify for comparison as well. And if more competitors to Neo Group’s F&B retail business is springing up, our daily commute can provide us the opportunity to observe the phenomenon and also develop a rough idea on whether the company can handle the challenges.

This is an example of a business that can be easy enough for any private investor to understand quickly. Of course, this does not necessarily make Neo Group a candidate for immediate investment as a deeper study will still be needed. But, it’s still a good start.

Foolish take away

So, the next time you look at an investment idea, run it through the “crayon test”. It ought to be easy enough to describe in simple sentences, or seen from a casual stroll to a nearby MRT station.

The bottom line is this: if we plan to hold a company’s shares for the long term, we should be able to understand how its business and industry changes over time. If we can do so, we might find ourselves with a stronger conviction to hold on to our shares and compound our wealth for the long-term.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.