TEXT OF INTERVIEW
Tess Vigeland: You know that game show: Are You Smarter Than A 5th Grader? Naturally we all think we are. But ask yourself this: Are Wall Street’s whiz kids smarter than a second grader? The answer in at least one case is no. In 2005, investment advisor Allan Roth embarked on an experiment with his then 8-year-old son Kevin. Could Allan teach Kevin about the markets and maybe even make a buck or two in the process? The result is Roth’s new book, out this week, “How A Second Grader Beats Wall Street.” Kevin’s portfolio beat the S&P 500 by 4 percent annually over two years. I asked him how dad first approached the idea.
Kevin Roth: Actually, first I didn’t even know what he was talking about, so I just kind of took a chance.
Vigeland: Had you ever heard the word portfolio?
Kevin Roth: I didn’t even know there was a word portfolio.
Vigeland: So, how did you convince Kevin that this was something you guys should do together?
Allan Roth: Well, we just started talking about simple rules, and those were rules that he had already learned. You know, as far as not putting eggs in one basket, not playing a game he couldn’t win. You know, we ate at McDonald’s, we shopped at Wal-Mart, so he knew those were companies. Then I just kind of explained to him how those companies get financing — that we all own stock in them — and then explained the concept of funds that own the stocks.
Vigeland: Did you actually open a brokerage account?
Allan Roth: Yes, we opened a brokerage account. Kevin got some money from his grandparents.
Vigeland: How much money are we talking?
Allan Roth: I’ve been asked this question a lot. We’re not telling how much money he got from grandma and grandpa.
Vigeland: Fair enough. Kevin, tell us about your portfolio.
Kevin Roth: I actually invested in three mutual funds. A a total U.S. stock index.
Kevin Roth: A total international stock index.
Kevin Roth: And a total bonds index.
Allan Roth: Kevin has a very long investment horizon. So he went 60 percent into the U.S., 30 percent international and 10 percent in the bond.
Vigeland: So he was 90 percent equities?
Allan Roth: Ninety percent equities. And again, with those simple lessons of not putting all your eggs in one basket so he couldn’t have just owned a couple of stocks because I explained to him, you know, certain airline stocks that were really big — like Pan Am and Eastern Airlines — when I was a kid, aren’t around anymore. So Kevin, do you know what the next hot stock is going to be?
Kevin Roth: No.
Allan Roth: So, rather than pick a few , Kevin wants to own the entire U.S. We spun the globe and I asked him, what do you think the next hot country’s going to be? And Kevin’s answer was “I don’t know.” And that’s the advantage Kevin has over most of Wall Street. He knows he doesn’t know.
Vigeland: Is it possible for us to take lessons from the second-grader portfolio?
Kevin Roth: I think it is. If a second grader can do it, you can do it.
Allan Roth: Kev, do you want to explain kind of the Macy’s example of what us adults do?
Kevin Roth: Yeah. Well, let’s say Macy’s had a “We doubled our prices” sale, and people lined up from midnight to 6 a.m. just waiting to buy.
Allan Roth: And if you think it’s what us adults do, in October of ’07, when the market’s hitting all sorts of highs, we feel fearless and we get into the market. And low and behold the market plummets and our fear returns and overcomes our greed, and we panic and sell. It’s kind of like showing up at Macy’s to but at double the price and then returning it when they have a half-price sale.
Vigeland: You know, if we’re not young enough to be putting 90 percent of our money in stocks and 10 percent in bonds, how do we take a lesson from, perhaps not that allocation, but the philosophy behind it, Allan?
Allan Roth: I think some of the lessons are, you know, No. 1, don’t’ bet your lunch money. You know, when the market was hitting new highs, a lot of people took risks that they didn’t need to on money that they needed in the near future. Another philosophy is make sure you can understand what you’re doing and understand it well enough to explain it to any second grader. Even Kevin knew not to lend money to people who couldn’t pay it back.
Vigeland: Kevin, I wondered if you could read a little bit from your postscript to the book? You talk about how you’re still going to do what you did before everything got so bad.
Allan Roth: Go ahead, Kev.
Kevin Roth: I don’t want to worry about what’s going to happen because I think it will get better. After a while, it always does. So I hope everybody won’t worry and get scared and sell. Because they’ll lose their money that way. Let’s all just do nothing together.
Vigeland: Well Al, what do you think? Kevin’s advice is “Let’s just all do nothing together.”
Allan Roth: Yeah, I know that he’s right. He’s got a huge advantage being a kid. I mean, I’m looking at the stock market 10, 20 times a day, and feeling a heck of a lot of pain right now, and Kevin thinks I’m just obsessing and I shouldn’t be doing it. He’s right.
Vigeland: Well it’s been really fun to talk to both of you. Allan Roth, Kevin Roth, best of luck with the book and thanks for all the advice.
Allan Roth: Tess, thanks so much. It’s been a lot of fun.
Kevin Roth: Thanks.
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