Learning About Investing

What I Learned from My 7 Year Old's Coca-Cola Stand

In October 2013, my son had his first official entrepreneurial experience.

He operated a Coca-Cola stand in our front yard during our semi-annual neighborhood-wide garage sale.

The experience was pretty cool - and profitable - for him, and I hope it makes a lasting impression on him.

But I also quickly realized that the factors that go into a successful kid's business are the same principles that make up a successful investment.

What Investing Really Is

And when I talk about investing, I'm talking about ownership.

That's what investing is - owning something, in whole or in part - with real customers and real products and services.

So what does my son's successful enterprise say about selecting successful investments (i.e. owning the shares of businesses that consistently make a lot of money)?

What it comes down to is the idea of competitive advantages.

So let's look at the competitive advantages my 7 year old had . . .

#1. A Decent Sized Pool of Potential Customers - i.e. a Market

We live on a corner lot along the busiest road in our subdivision, and while we get a lot of traffic past our house, a lot of it is "thru" traffic of people using our street as a shortcut between a pair of main roads outside our subdivision.

Some of the sales came from that traffic, but the bulk of my son's revenue came from the source we expected - people drawn specifically to our neighborhood by the large number of garage sales.

There he had two factors going for him - these drivers were much more attentive to what was going on in yards, and they were prepared to spend money.

#2. Dominant Brand and Product with Proven Demand

A lot of my son's success came from the product he'd chosen to sell.

Yes, it's widely known that North American carbonated beverage consumption is down, but soft drinks/soda still sell, and Coca-Cola is THE dominant brand.

We leveraged the strength of the Coca-Cola brand and instantly recognizable logo by fashioning the boxes into signs themselves.

They were affixed to the table and in signs staked at either end of the yard so it was clear what my son was selling.

On a couple of occasions, we saw vehicles stop and turn around, and on a couple more, I saw drivers slow down, hesitate, and then at the last minute drive off.

If our signs had been home-made banners that just read: "SODAS" I doubt we would have seen people turn around or be seriously tempted to stop.

We further tried to leverage the Coca-Cola brand through other means - my son wore a red polo shirt, and we tried to project an image of happiness (the whole psychology of branding is fascinating - the Coke brand equals "happiness" while the Pepsi brand equals "fun").

So there my son was at one point - smiling and waving to drivers as they drove by.

Whether that had any material impact on sales is debatable, but at least we reinforced Coca-Cola's brand - he did get quite a few waves and smiles back from passing vehicles.

#3. No Competition

It's not that no one could compete with my son, it's that no one did.

It's true that the location of our corner lot was an enormous advantage in moving product, but the more you have a market to yourself, the more profitable and successful you're going to be.

In the U.S., McDonald's has mastered the art of location. I don't know how they do it, but they always seem to command the best locations relative to their competitors.

It's hard to have a global monopoly, but global duopolies (like Coke and Pepsi) reveal the same principle.

Coke is number 1 in beverages and Pepsi is number 1 in snacks because they dominant the competition through a combination of brand strength and distribution infrastructure.

#4. Pricing Power

This is more the natural result of having all the other competitive advantages locked up.

When you have a dominant brand, offered to customers at periods of peak demand, with no competition, your profit margins are going to soar.

My son - and yes, I had him invest his own allowance money to authenticate the experience for him - bought in bulk when Coke was on sale.

His cost was basically 25 cents a can which he then turned around and sold for $1.

That's a pretty healthy profit margin!

And no single customer ever balked at the price.

What All This Means for Investors

Honestly, this is more than a cute story about teaching a child the importance and rewards of being industrious.

This is the case of the oak tree being contained within the acorn.

Ultimately, my son was successful because he "invested" in Coca-Cola in a back door way without actually owning the shares.

He was successful because Coca-Cola is successful, and he stacked the deck in his favor with some of the other Retail 101 factors.

Seriously, successful investing is no more complicated than what my son experienced.

Yes, building wealth, saving for retirement, improving our material lives as adults is an enterprise that takes place on a much larger scale, but the principles are the same.

And they're not complicated in the least.

If a 7 Year Old Can Do This . . .

If a 7 year old can do and understand this, why do so few adults get it?

Why do we end up owning inferior businesses?

Why do we get sucked into the managed money industry's nonsense about the need to "diversify" and basically own all businesses - both the dominant ones like Coca-Cola and all the other ones that are getting their asses kicked by companies like Coca-Cola?

Why do we get sidetracked by the temptation of get rich quick trading systems dangling images of bazillionairehood just beyond our reach?

A lot of "investors" have already given up and just go with what they're told and own mutual funds and indexes/ETFs.

Others - to their credit - reject that choice but waste years and capital looking for some ideal trading substitute for actual investing.

The Formula for Building Wealth . . . Improved

I've said this before, but my life changed once I stopped looking for some supposedly superior alternative to investing and instead started looking at ways I could improve the investing process itself.

The formula for building lasting wealth and an ever-increasing income river is very simple (just ask my newly indoctrinated 7 year old):

Own High Quality Companies at the Lowest Prices Possible.

Adopting the ownership mindset is fairly easy to do, as is identifying dominant, world-class businesses.

Adding conservative, easy to understand, structurally-advantaged option trades to the mix as a way to get those "lowest prices possible" isn't very difficult to do either.

But it's still more than what the majority of struggling "market participants" are willing to do.

As the saying goes, if you want the same results, keep doing the same thing.