Teach kids financial literacy with basketball

Savvy investors come at any age.

Ralph Baker, a New York City day trader with an MBA from Darden at the University of Virginia, found that out firsthand.

In 2006, he founded the New York Shock Exchange, a recreational kids’ basketball team for inner-city kids. What made this team different was that Baker taught players about investing between games. He wanted to teach his 11-year-old son and his friends about the stock market, and thought basketball would entice them to show up for lessons.

Together, the team crafted a model portfolio that Baker says beat the investment returns of some professionals, and foreshadowed the financial crisis.

“Kids can make better investments than adults because they spot trends before adults,” he says.

Baker himself learned the value of understanding the market when he was young. His father, a Vietnam War veteran, had him read the Wall Street Journal starting in the fifth grade. “He said, ‘When I get home, you better have something cogent to talk about,’ ” Baker says.

Baker sat down with Advisor to Client to talk about his time coaching, which he writes about in Shock Exchange: How Inner-city kids from Brooklyn predicted the Great Recession and the pain ahead.

Q: Did the kids develop an enthusiasm for investing as you taught them?

A: They did. You should invest in what you know, so I said, tell us about some products that you use that you think would make good investments. So we started with a blank sheet of paper, and [the kids] threw out names like Apple, GameStop, Nike and Pepsi. We narrowed the list down to Apple and GameStop based on investment fundamentals, like earnings growth rate and price to earnings ratio.

I picked Phoenix Companies. It’s an insurance company, and I thought it was going to get taken over. I purposefully picked a stock that wasn’t based on fundamentals. The kids and their parents were upset; they thought I was picking on the kids because I’m an expert in investing.

A year later Apple had a return of 113%. GameStop had an average of around 82%, and my stock had a return of negative 1%. When the kids realized they were better investors, they became emboldened by it. The thing I take away is that kids can make better investments than adults because they spot trends before adults.

Q: Would you say it’s as if kids have sector expertise?

A: In a lot of ways they’re trendsetters. While you and I have Facebook and Twitter, they’re onto the next new thing, whether it’s Instagram or Snapchat or what have you. They’re good at finding the next growth market or [new] growth in a company before adults because they’re always on to the next thing.

If you understand what [kids are] doing, what they like, that’s a way to get ahead of everybody else.

Q: How did you explain difficult concepts?

A: We compared the price-to-earnings ratio to basketball players. We took their salaries and we divided by points scored. Based on these statistics Kobe Bryant [for instance] was making about $6,847 per point scored. Then you look at whose points-per-game is going to grow the most. That’s how you would look at the stock market.

Q: You mentioned they forecasted the crash. How did that happen?

A: It was an accident. There are probably 100 different things you could look at that drive the economy, but I took the two big-ticket items that drive GDP¾auto sales and housing stocks¾and we tracked them. We showed [the kids] the bottom-up analysis. We also looked at it from a top-down perspective. As we kept meeting over time, we started noticing these trends getting really negative, and nobody was talking about it.

Q: What advice do you have for parents who want to help their children become financially literate?

A: Try making it fun. The key is not to take something that nebulous and make it even more complex by using a bunch of industry jargon.