Kids’ interest in finances will pay off

Unlike many of us, Motley Fool co-founders David and Tom Gardner were lucky to have childhoods that featured financial education. You can get some ideas from their thoughts and memories:

David: Make banking interesting for kids by showing them statements for their accounts, letting them learn their account number, and maybe even having statements mailed to them in their name at home. You have to look for ways to make this stuff relevant to the child on the child’s terms.

Tom: My best memories revolve around playing games — Monopoly, Life, Acquire and other stock-market investment games. Winning the games meant more than learning about money, to be honest. But the two ended up traveling together. (Get great game ideas at www.funagain.com.)

David: Around eighth grade, Dad started sitting us down with Value Line (reports — available at many libraries). He would teach us some numbers — such as net profit margin or return on equity. Value Line is organized by industry, so Dad would have me go through, say, the defense industry, and compare margins among the companies in it. He’d explain that higher is better, and when I pointed out which companies had the highest margins, he’d ask me why I thought that was. He pointed out how higher margins can lead to competition in an industry, but that companies that maintain high margins over time are strong, defensible businesses worth considering for investment. It’s good to teach your kids with props (like Value Line), not just discussion.

Tom: We learned that when we owned a company, we wanted that business to succeed. Therefore, as investors, we wanted to look for companies that we felt would be successful — perhaps for our entire lifetime. We never really looked at stock prices that often. I mostly remember that we’d discuss a company’s products and services and people.

Ask the Fool

Q: Should I avoid companies with low profit margins? — G.R., Dothan, Ala.

A: In general, higher-margin companies are more promising than lower-margin ones. There are plenty of exceptions, though.

Imagine two companies: Buzzy’s Broccoli Beer (ticker: BRRRP) has a whopping net profit margin of 28 percent, while Scruffy’s Chicken Shack (ticker: BUKBUK) has only a 2 percent margin. If Buzzy’s sells only five beers a year while Scruffy’s sells out of chicken each week, Scruffy’s may well be the better buy, generating more cash in total than Buzzy’s.

Some industries, such as software, typically have high profit margins. Discount stores and supermarkets typically have very low profit margins — but if they turn over inventory fast enough, they might still be good investments. Wal-Mart, for example, sports a net profit margin around 3.6 percent.

Q: Why would a company that takes in lots of money be a bad investment? — K.M., Santa Maria, Calif.

A: Well, most major companies take in millions, if not billions, in revenue. What’s critical, though, is how much (if anything) they keep as profit, and whether important numbers, such as sales and profits, are increasing. OfficeMax, for example, took in $9 billion in 2005, but that was down from $13 billion in 2004.

My dumbest investment

I was a new investor. Even though I read The Motley Fool, which believes in finding solid companies and holding them for the long term, I kept glancing at the market’s big winners, dreaming of a stock that would make me rich the next day. I followed one big winner closely. Its name ended with “W.” I saw it shooting up for a few days, then falling back, then repeating. It seemed like an easy catch. One day it fell sharply. I was excited and bought some. The next day it fell even more, but I did not panic. I decided to buy more! Soon, the stock was no longer traded on the market. I was shocked. Why? I had no idea. I eventually learned that this stock was a warrant, and it had expired. — Ehab M., Al-Ain, United Arab Emirates

The Fool Responds: Like options, warrants convey the right (but not the obligation) to buy or sell a set amount of a certain security at a set price within a set period. Learn more at http://investopedia.com/ dictionary.