I know what you’re thinking; This is a joke, right? Rest assured; it is not. You mean, with like, real money? Yes, with real money. Margin trading, which is borrowing money from the institution in order to make a trade, is a service already offered by basically any legitimate trading house. However, by not letting those under 18 margin trade, we risk not only stunting their education, but the government pries freedom away from their parents while doing so.
Many banks and credit unions offer savings accounts aimed towards children. Let’s assume for the sake of argument good intentions by these financial institutions and this isn’t just a way to pad the balance sheets. The point of these accounts is to teach kids good financial habits such as saving for a rainy day. This isn’t a bad thing per se, however there are many more financial lessons that children will need to learn. Investing is absolutely vital to building wealth, and the pitiful return on investment that a savings account would yield is not going to drive that lesson home. We must also acknowledge the inherent double standard at play here; it’s okay to pitch children certain financial accounts but not others? Who decided this? And on what criteria?
Best-case scenario is that Little Johnny uses the leverage that is available to him to go long on an undervalued stock, and the price has an unexpected surge upwards. Using very little of his own capital, Little Johnny has reaped a much larger return on his courageous investment (kudos, Little Johnny!). Little Johnny, having a savvy head on his pint-sized shoulders, chooses to lock in his victory and sell, thus triggering a capital gains tax event. Little Johnny uses part of his proceeds to pay of his margin loan and pockets the difference for himself. Mom and Dad hang Little Johnny’s 1099-B up on the fridge, teary-eyed at how proud of their precious Baby Buffett they are (as they should be!). Who knows, maybe Little Johnny might just yield enough to become an accredited investor (even though that is kind of a bullshit concept anyways).
Little Johnny has learned several valuable lessons in the above scenario. First, Little Johnny has learned that debt can be an incredible wealth building tool, if used to buy an appreciating asset. He has learned that using other people’s money can generate far greater returns than he could if he had just used his capital, after all some deals are only possible through using other people’s money (but hey, don’t just take my word for it). Little Johnny also learns that there are no great returns without taking risk, and taking risk requires courage. Furthermore, Little Johnny learns that Uncle Sam will take a cut of his profits (eww…taxes) and that he needs to square up with the government. By paying off his margin loan, Little Johnny practices financial responsibility while he’s at it. These lessons cannot be learned in just parking his money in a savings account.
Now let’s examine the worst-case scenario. Little Johnny takes a YOLO bet on a company’s stock using leverage and goes long. The company that Little Johnny invested in has no competitive moat and a weak balance sheet. Soon after buying in, the price of the company drops considerably. The risk-averse institution that hosts the margin account makes a margin call on Little Johnny, demanding their money back. Little Johnny is in debt now. Worried, he pleads to the Bank of Mom and Dad for a low-interest bailout to pay off his margin loan, though his application is rejected. Little Johnny has to nervously work out a payment plan with his creditor. Little Johnny starts aggressively mowing lawns, shoveling snow, selling lemonade and minting NFT’s to come up with the money to pay down his margin call, all the while daydreaming of his next big stock pick.
Even in the worst-case scenario, Little Johnny learns numerous valuable financial lessons. First off, Little Johnny learns that debt can be dangerous, and taking on debt is not to be taken lightly (a valuable lessons, especially when learned early in life). On top of that, he’ll learn that the institutions he’ll deal with are quite risk-averse, and he’ll need to factor in the squeamishness of his creditors the next time he decides to buy on margin or raise capital for a company if he becomes an entrepreneur. Assuming this gave Little Johnny a sleepless night or two, he’ll quickly learn his own risk tolerance in investing (another valuable lesson to learn early on!). Most importantly, Little Johnny will absolutely learn to perform due diligence on a stock he wants to buy for next time. As a side benefit, his denial from the Bank of Mom and Dad birthed an entrepreneurial zeal in Little Johnny. His experience also showed that he might not always receive a bailout. None of these are lessons that can be learned via parking money in the safe harbors of a savings account.
“But Dan, we don’t have to literally indebt our youth or subject them to cortisol-fueled sleepless nights to teach them valuable financial lessons” a detractor will say. Where else will they learn these lessons? “Well, it should be taught in schools!” the detractor will retort. Well, we don’t live in the Land of Should, we live in reality, and the reality is that 36 states do not require any personal finance curriculum whatsoever. Even if personal finance curriculums became universal, real-world experience will beat hypothetical situations from an outdated textbook any day.
No matter the outcome-and the varying sets of lessons learned-Little Johnny will gain valuable experience in investing. Investing is crucial since very few can brute force save their way to a comfortable retirement. Furthermore, we can have these youth trades documented on the blockchain. Besides the obvious verification of bragging rights, Little Johnny will eventually turn 18. When he does, he can use this documented experience to show potential employers on Wall Street that he is capable of doing the job (assuming he has more good trades than bad ones).
Lastly, the government frankly shouldn’t be blockading children from margin trading. The road to hell is paved with good intentions, and this is no different. In Uncle Sam’s quest to patronizingly protect children from themselves, they have wrestled financial education, a key part of one’s upbringing, away from the parents. Call me crazy, but I feel that the ones who decide what financial lessons Little Johnny should be taught should be Little Johnny’s parents and not the government.
So, let the kids margin trade, I say!
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