Your Child Can Out Perform Warren Buffett: Mini-MBA, part 3/3

cropped-jmc-lemonade-stand.jpgI reach into my pocket for two crisp $1 bills. “Kids, do you know what I do for a living?”

My kid’s twenty-odd classmates stare at me blankly.

“Magic.”

I hold up my hand, pressing one bill tightly behind the other. I shake my hand and out pops the hiding bill.

“I just made $1 into $2 dollars. That’s what I do. You could do it, too.”

I lied. They can do even better than that.

I’ve performed this trick in both Zuzzy and Zack’s classroom “Career Days.”  No one finds the magic trick incredibly magical, but they do get super interested about how to turn $1 into $2.

(This is the 3rd and final part of our mini-MBA series. Before continuing, I’d recommend reading part 1 and part 2.)

In part 1, I suggested doing 3 lemonade stands so that your child can see how improving their process pushes them from average to good to great.

My children have done five lemonade stands. This fall, they are branching into autumnal beverages with a hot apple cider stand. They have become excellent at their business. In fact, my daughter Zuzzy asked to give a presentation to her class on how to invest in your own lemonade stand. This is an actual email from her teacher, who made 2nd grade a wonderful experience:

This morning Zuzzy asked me if she could teach the class something about investments. I said sure. Well, she completely blew me away with her well thought out lesson plan, materials, and delivery of a very professional lesson. The kids were so engaged and very interested in what she had to say. Another teacher happened to walk into our classroom and was so impressed as well.

Starting a business and learning how to make their own money can be fun for many children. Sadly, most don’t know it’s an option (like me, growing up) or never start because it seems “hard” or “scary.”

Casey’s Mom Has Got It Going On

Parents are the great facilitators of learning outside of the classroom. Because of her mom, young Casey has a leg up on the typical Harvard MBA. Let’s review what Casey knows:

  • She knows how to take something from idea to product.
  • She knows how to plan for complex projects.
  • She knows how to capitalize her business and the difference between debt and equity.
  • She knows how to do a P&L.
  • She knows how to run a review process.

She’s good–very good–at running her business.

Here’s how she can be great like the most successful of entrepreneurs.

Optimize. Implement the “things you could do better” from the Lemonade Stand 1 review.

  • In the first part, Casey and her mom squeezed the lemons before making the syrup. Now they do it simultaneously, reducing their production time by 10 minutes.
  • The mother-daughter team also realized that sell-through wasn’t as great as it could be, so Casey’s mom suggests an area in their neighborhood with more foot traffic, next to the strip mall.

Understand when to make it simple and when to add complexity (managing risk).

  • When making anything, the rule is better, faster, cheaper, and simpler. Casey is already making it faster by optimizing her process. However, she currently only has 1 product–lemonade. Casey’s mom suggests another product: sparkling lemonade, just to see how it would do. Since a bottle only costs $1, it seems worth it to give it a shot. They add “sparkling water” to their shopping list.

Review.

  •  I suggest consistency with this step, asking the same two questions we covered in part 1.

Lemonade Stand 2

Casey and her mom set up near the strip mall. Sales are much more brisk today. There are sometimes even lines. For every 4 cups of lemonade, she seems to sell 1 cup of sparkling lemonade. When they’re done, they count the beans:  

  • Lemonade Stand 1:  $30 in sales. Cost was $10, but total cost was actually $15 to buy out her Mom’s 50% equity share. So profit was $15.
  • Lemonade Stand 2:  $50 in sales. Cost was $9 (less than the first time due to using the leftover cups and sugar, somewhat offset by the sparkling water), thus profit of $41.

Why was the Lemonade Stand 2 outcome different? Casey and her mom observe that Stand 2 had higher sell-through from the busier location and extra sales from sparkling lemonade. Sales rose much faster than cost–since a bottle of sparkling water only cost $1, she only needed to sell one cup of sparkling lemonade to make it worth it. It was a wise risk to take.

She’s looking forward to making other improvements for Lemonade Stand 3.

How Does The Lemonade Stand Compare to Other Forms of Investment?

So, how much did Casey really make? Well, depending on whether she took the loan or sold a part of her company–let’s keep going with the equity example–her cash outlay was $15 but she made $30 in Lemonade Stand 1, invested her retained earnings into Lemonade Stand 2 which made $50.

She turned $15 into $80.

Magic.

But how does Casey compare to the S&P 500 (the gold standard) and Warren Buffett’s Berkshire Hathaway (the icon)? Moreover, how does Casey compare to Private Equity and Hedge Funds, which are considered by some to be the best money-making inventions in history?

Asset Class 20-yr Returns
S&P 500* 9.85%
Private Equity* 13.50%
Hedge Funds** 8.60%
Berkshire Hathaway*** 19.70%
Casey’s Lemonade Stand**** 195.83%

Casey not only beats them, she demolishes them. They’re not even in the same universe, and this is taking it easy. If she continues throughout the summer, it would look even uglier for poor Warren as well as the smart guys running the Private Equity and Hedge Funds.

At this point, you might be wondering 2 things.

  1. What is the secret of the Lemonade Stand? Why does it so handily defeat any other investment? (Find the answer at the end of this post.)
  2. Is Casey taking any new investors? Sadly not, but fortunately, your child might be ready to use Casey’s formula this weekend.

 

Now that we’ve concluded the Mini-MBA/Lemonade Series, I hope you’ve found it helpful and are ready to get started with your child–and that you’ll let us know how it goes, or what you think we could do better, in the comment section below.


*From Cambridge Associates report; data as of 12/31/14

**From Credit Suisse Hedge Fund Index as of 2014

***From the Berkshire Hathaway 2013 Chairman’s Letter

****This is just a 2 week return. Imagine if Casey sold throughout the summer.

(Here’s the secret to the Lemonade Stand:  Water. It’s the main ingredient in lemonade, which is why her profit margins are so high. Since water is (relatively) free, the more water she adds (like sparkling water or ice) to a cup, the more she increases her profits. Casey discovers this when she does her profit analysis and review. She develops this insight only as the result of doing more than one lemonade stand.)


FREE Guide to Help Your Child Start Making Money Download

Reading about helping your child start a business is a good start, but the real learning and habit formation starts by doing.  I’ve found it helpful to have a quick, easy-to-understand guide.  Just fill in the form below, then click “Download” and I’ll send you the FREE guide!

Help your child launch their first business the right way with this FREE Lemonade Stand Guide, exclusively for subscribers.  It’s a perfect, quick, and comprehensive companion to helping your child learn how to make money like a pro.

 

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