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How to make 7 million in 7 years …

Speculating on stocks; how much is OK?

Twitter IPOAs I mentioned in my last post, my 19 y.o. son’s online business is doing quite well …

… well enough for him to start thinking about investing in stocks. Or, real-estate.

But, right now, he’s thinking mainly about stocks.

Unfortunately, his thoughts are more towards Tesla and Twitter than GE and Unilever.

At least, he knows they (TSLA and TWTR) are speculative ;)

So, this is how the conversation went:

AJC Jr: I want to invest in Twitter. How much should I invest? I have quite a bit set aside …

Me: How much you have to invest is the least important part of your decision-making process.

AJC Jr: Oh! What’s the most important part, then?

Me: Well, son, you’re considering speculating in a technology stock that could go in any direction. How much to invest actually depends mostly on how much you’re prepared to lose?

AJC Jr: Hmmm. In that case, I think I’m prepared to lose $10k.

Me: OK. Now, how far do you think the stock is likely to fall.

AJC Jr: I think it’s going to go up!

Me: Of course you do ;) BUT, if it does fall, how far do you think it will go … worst case?

AJC Jr: If I wait for a while – for all the IPO hype to die down – and buy Twitter at more reasonable $30 a share, then I think the most it will go down is $10.

Me: In that case, if you are prepared to lose $10k and you only think the stock will drop by 1/3 worst case, then you could invest up to $30,000.

AJC Jr: But, I could afford to invest a lot more in stocks!

Me: Sure! Just not in risky stocks … and, not more than $30k in Twitter. Now, take look at this stock chart for a nice, safe, boring trash dumping company I’m considering investing in …

When investing, decide if you’re in it for the long-term, or if you are simply blindly following some boom/bust tech trend; if the latter, look at how much you’re prepared to lose and make your decision on how much to invest based on that.

 

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2 Responses to “ Speculating on stocks; how much is OK? ”

  1. Milan says:

    What a great parenting AJ. I love it! I have a son, only 2. But I would consider it to be my biggest achievement in my life ever if when he grows up, is happy, curious, willing to learn, fail and get back up every time. Seems like you did fantastic job learning that.

  2. millionsandmillions says:

    key lesson took me a long time to learn.. its not about the price of the stock its about the total value of the company and the earnings against that value… PE and growth… pe should match growth and he should try to pick which ones will be hyper growth above their PE…. teach him income and profits he will start to like Exxon better than twitter.

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