Few $, long term, children

Investment Analysis Clubs Saul’s Investing Discussions
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I want to pick the collective brain of the all the investing gurus on Saul’s Investing Discussions board.

I have children, ages 9-17, with small amounts of funds, $300-$5000 for investing. There are varying minor amounts, at no specific intervals, that can and will be added. What are your thoughts for investing strategy with such parameters?

Put all the money into only one company since the amounts are small?

Get diversified with $500. each in 4, 5, or 6 companies?

LTBH

  • “if you had bought $1000. of KO in 1940 and held it until today it would be worth…!!!” Buy a stable staple dividend payer, (like KMI) today with the total amount of $300-$3000, and fa-getta-bout-it?
  • index MF/ETF to build a long term foundation to build upon in the future?

Go for Growth

  • find 2, 3, or 4 high growth companies (like many we discuss on this board) and see if they fly or die? (I did put one of my boys into TSLA very early and he has seen $300 become $1500! Isn’t that cool!?! If only…)

These are just my musings. Maybe some of you are in the same boat with your kids. However, I value the opinions of the Fools on this board (you are my investing club) and I would like to ‘hear’ what you think.

For what it’s worth,
KLVanLiew

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Put all the money into only one company since the amounts are small?

Get diversified with $500. each in 4, 5, or 6 companies?

I think the most important thing about a situation like this is the platform you have to teach your children about investing using real money. If it was me, I would construct a mini-portfolio and let the kids know what I did and why.

Jeb

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Thanks Jeb.
To date that is what I have done and am doing.
Continuing the learning process for me and them,
KLVanLiew

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With my daughters I went with smaller amounts (never less than $500) in a diverse group of companies that were from TMF universe but that they could relate to. I gave them a list and then let them choose. Sometimes they added to existing positions. It was certainly much better for their educational purposed to have a connection to the company. They now hold positions that have all grown in DIS, SBUX, AAPL, COST, WFM among others. Given the time frame I think these choices, although conservative, will work out just fine. We also got to discuss the concept of a dividend, which turned out to be appealing to both of them and may have affected their choices.

D.

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With my kids, the first thing I did was show them compound interest and the effects of time and rates. With my daughter it worked, she is Very protective of her nest egg at age 20… With my son he blew his substantial nest egg on a couple of girls, and now at 26 wishes he had a down payment for a house…

I have free trades at Wells Fargo so I let my kids have them. I picked stocks out of the SA and RB universe that were of interest to my children. And I think you need a minimum of 5 positions if you are going into stocks, even for kids. Too much event risk otherwise.

Good luck.

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I went and looked up my daughter’s stocks, she has Z, YELP, CMG, ULTA, AAPL, MIDD, and ILMN. I also have her in some SODA, which she gives me grief about… Anyway I tried to pick things she knew about, she is majoring in molecular biology, so ILMN is not as strange as it sounds.
She has a couple of others but you get the idea, I was looking for things with long runways and of interest to her, AAPL is probably questionable, not sure they have a long runway. The multiples make me cringe, but I cringe and go ahead anyway. She has done very well and I do some match money with her to incentivize her to contribute to a Roth.
I am hoping she will get through college without needing her investments, but we are only promising to pay her(god awful) tuition, so she may need some for dorm if she chooses to stay. We live close to her university, so she could live at home for free. And we did pay for the first year of dorm but we are not guaranteeing that.

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Anyway I tried to pick things she knew about, she is majoring in molecular biology, so ILMN is not as strange as it sounds.

Flygal,

I also majored in molecular biology. Then I worked for 20 years in the molecular tools industry before focusing on primarily on investing while doing some consulting in my field. I recently finished an industry market research consulting project which included a deep dive into the DNA sequencing market. I also owned ILMN from 2012 until earlier this year. I had purchased at around $50 but sold out between $150 and $180 because I was getting nose bleeds from the sky high valuation.

ILMN’s business is probably 70% DNA sequencing and 30% microarrays. The DNA sequencing market (for research applications) will probably be about $1.4B and ILMN dominates this market. The market is growing at about 20%. The other companies just can’t compete on the high end and ILMN is continuing to take market share. The competitors are 1) LifeTech (called Applied Biosystems prior to 2008) which was recently acquired by Thermo Fisher and 2) Roche which is the number 3 competitor. Pacific Biosciences (a RB stock) is a third generation sequencing technology company with a system on the market but at $25M in sales and a market cap of $400M it’s a small player that has been relegated to niche applications after the cost of seqeuncing dropped rapidly to $800 per genome this year; Pacific raised more then $600M from private investors and its IPO and I don’t think investors and shareholders in PACB will do very well. ILMN’s HighSeq system has decimated sales of the Roche system (pyrosequencing technology from its 454 acquistion) and the LifeTech SOLiD system. Roche will discontinue its system and ABI hasn’t sold a SOLiD system in over a year. Roche has nothing left after failing to acquire ILMN in 2012 and failing to acquire LifeTech this year (it tried to get both). Roche acquired Genia recently and is now banking on another technology disruption (nanopore technology). Third generation sequencing technology like nanopore technology could disrupt current approaches but the technology still has several challenges to overcome and is still at least several years away. LifeTech’s IonTorrent system has had some success in the market for exome and targeted sequencing; however, it just can’t compete on the high end against ILMN’s HiSeq. ILMN recently launched the NextSeq system which is a midrange sequencing platform to compete against IonTorrent. IonTorrent could be in trouble because you don’t want to only have a midrange product. IonTorrent technology can still improve but the improvements are too slow to compete against ILMN in the high end. So it looks like ILMN will continue to dominate in the research market which is growing at 20%. The competitors are on the ropes and unless there is another major technology disruption ILMN will remain on top for the foreseeable future.

But the valuation of ILMN cannot be justified unless there is a major adoption of sequencing for clinical diagnostics applications. All 3 competitors are moving to be there with product solutions for sequencing applications for diagnostics. This is still a very small part of the market, maybe $100M/year versus $1.4B for the research market. There are many hurdles to adoption of sequencing for clinical diagnostics. The main hurdle is regulatory. I think this will be a major challenge for years to come and I would not bet that it will be solved anytime soon. So my opinion is that at a market cap of $23B, ILMN is waaaaaay overvalued. If you look at earnings and increase it at 20% per year, you will need a lot of years to get a reasonable valuation. Roche offered less that $6B to buy ILMN in 2012 and they might pay $10B now to own the DNA sequencing market…but that would mean a price of $75-80 which is less than half of where it’s trading now.

Your daughter is interested in the field has she learned how to analyze financials and projected growth rates and then compare these to the valuation to determine if a company is worth owning? If you and she are banking on sequencing being big in diagnostics then perhaps it would be wise to learn more about the regulatory, privacy, reimbursement, etc issues that could inhibit adoption.

Chris

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Thanks for input FlyGal5. I do appreciate it. Definitely working to educate my kids.
KLVanLiew

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FlyGal5,

I have 5 kids and have built a portfolio for each of them. Some are constants and others are specific to their interests, personality, etc… They own a host (in fact, probably too many between them) of SA and RB picks from over the last several years. Several are the same as those you have mentioned.

I am pondering how aggressive to be. Should I 1) swing for the fences with some RB or Saul type high growth or 2) build a conservative solid, potentially dividend bearing, foundation, or 3) make some blended portfolio? To me, the small amount of capital to invest, makes up half of the equation.

Part of me wants to see all their investments head for the moon today and the other part says “we’ll get there soon enough”. I have purposed to choose the blended strategy with a bit of aggressiveness thrown in based on their long investing timeline. Still having to educate my own investing temperament, makes training their’s twice as hard. But, that’s part of the process of life’s lessons too.

I was looking to get some help reflecting and sound boarding with the Fool Community. And, thanks to you and others, I am getting it.

Here’s to more and bigger winners and fewer and smaller losers,
KLVanLiew

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Kids have a very long term horizon.

Still, if you totally shoot for the moon, what if none make it and most crash and burn?

Why not go for a nice mix of big SA companies that should do well under all conditions? Such as Berkshire or Costco.

Get a few in the middle such as perhaps Starbucks, Disney or Hasbro.

Then, get a few more aggressive type companies. Sierra Wireless is a re-rec and if you are a member of RB, look at some of the ones there. I belong to RB as well, so go to a board there and let me know which one and I will tell you the ones I like.

The main thing is to get your kids involved in the process and try to teach them as much as you can.

Fool on!

mazske

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https://www.oneshare.com/stock/starbucks

First thing when my grand kids were born, I bought a single share of SBUX and hung them up in there rooms with some room for the other shingles they will obtain as the journey begins.

Then created 2 sets of portfolios worth 14k each. Each portfolio consists of 10 stocks in rotation. Each year will add 14K into the portfolios. As each stock achieves it’s target price or traded per the 15ema crossing over the 50 ema, they were replaced with another stock in it’s slot and compounded the monies. Adding a Perpetual Income folder with O, MAIN, GOOD, VNR, DPD, DPO, AAPL. Dividends will be DRIP’ed.

Did the same thing for my two (2) kids, however only invested in five companies being GMCR, SBUX, MCD, XOM and the QQQ’s.
GMCR was the best stock I ever owned. July of 1994, bought 30,000 shares of GMCR, June 1992, bought 500 shares of SBUX. Compounded each stock into the next signal purchase.

Traded them as normal until the stock splits came in :

GMCR…Splits: Jan 12, 2001 [2:1], Jul 30, 2007 [3:1], Jun 9, 2009 [3:2], May 18, 2010 [3:1]
SBUX…Splits: Sep 30, 1993 [2:1], Dec 4, 1995 [2:1], Mar 22, 1999 [2:1], Apr 30, 2001 [2:1], Oct 24, 2005 [2:1]

My daughter got her BA in Biology, her Ph D in Molecular Cellular Biology and her Masters in Bio Medical Writing all paid for my GMCR. Currently a Bio Medical writer subcontracted out to JNJ.

My son got his BS in Business Administrative Computer Sciences. Again, paid for by SBUX and MCD. Currently a Web Page Developer/ Network Analyst.

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Well done, Quillnpenn. Very well done!

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Chris, you may be right and ILMN, may not work out. I did not like the government response to 23 and me. As a matter of fact I intend to get sequencing done for my family, even if we have to get it done outside the US. My family has a history of mild bleeding disorders, and they live freakishly long lives- when they don’t bleed to death. I was hospitalized for a week in my 30s with an unstoppable nose bleed. I am not sure I would “fix” it if I could, because it does seem to protect the cardiovascular system, but it would be good to know more.

My great-grandfather and his siblings all lived to be at least 96 and one lasted to 112. Not bad for people born starting around the War Between the States. Nine of them, eight lived very long lives one died after being gassed in WW1, he survived the war but died of lung disease not long after. They had several first cousins bleed to death…and the pattern has been consistent in younger generations.

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Hi KL,

A couple of ideas:

You want to make it fun for the kids. I would consider first explaining what a stock is, and then presenting the stock market as the biggest and best game there is. Then I’d tell them what you look for in a company you invest in. I’d explain compounding growth by letting them multiply $100 by 1.2 or 1.3 ten times, and then twenty times to see what that $100 would grow to in a company that could keep growing at 20% or 30%. I’d try to pick (and let them pick) companies that they are interested in, or could be interested in, even if they aren’t your first picks. You might consider making a competition between them (for a year, say) or for each of them to see how they do compared to the S&P, but warn them that growth stocks will go down more than the S&P in a down market. I’d say that one stock was too risky (you don’t want them to get in bad habits, even with limited funds). Probably 3-4. I’d pay the commissions for them at first since they have small amounts of money and the commissions would take out too big of a chunk.

That’s what I can think of for now

Saul

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Hi KLVanLiew,

Unless they are already accustomed to investing, I would recommend doing what I did with my nephew (he’s 22). First, I explained the concept of compound interest, which is not rocket science and he already understood this.

But then I created a very simple spreadsheet with him (it took all of 5 minutes or so) and showed him, in real numbers, how depositing money into an account every year and earning money on the deposits will compound over time. The resulting graph looked nice. Then we talked about doing this for 20 or 30 years and increasing deposits over time. Then we had a discussion about having the choice to make the future better through investing in stocks as apposed to investing in music and gadgets now. I tried not to preach (it was hard, because I love him and want the best for him).

Thereafter, we pulled up performance data for the S&P 500 as well as the DAX and ran some scenarios of gains and losses over time. We had a pretty long discussion about risks and what kind of investments may make him feel uncomfortable. He was able to see what happens, generally, when one dollar-cost averages over time.

The last thing I wanted happen is that he looks to me for stocks to buy. Instead, it was important that he invest the proper amount of time in handling his investments on his own. As he is in the middle of an apprenticeship, he came to the conclusion that he has no time to study individual companies (even after 17 years of doing it myself, I sometimes feel that I am still a novice). So he opted to put EUR50 per month into a DAX index fund.

I think it may have gotten through to him, because he’s been doing this since February and doesn’t even pay too much attention to the market prices. When I asked him about it, he just said that he’d rather look 20 years from now to see what has happened. Perhaps he’ll be interested in individual companies one day. If not, at least he’s on his way to saving and being a good passive investor.

I don’t know if this helps you. But it helped my nephew and it makes me feel like a pretty good uncle.

DJ

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To me it is less about “winning” in the short term than educating on the right way to invest long term for them so that when they are doing it on their own later they know what to do and don’t fall into the common traps. I teach my 11 year old to invest as an extension of saving … This is money not to be wasted … He is working on the down payment of his first home and i view it as my need to teach him how to be financially sufficient for the rest of his life.

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Hey mazske,

Thanks for the reply. That is essentially what I have been doing for the past three years or so. I need not get greedy, and teach my kids the ‘wrong’ way to invest. Have to work on my own investing disciplines to teach them how to be disciplined. I have also been helping my mom with a small amount over the past year. Spread her’s on 15 SA/RB picks and made her 20% in one year, 7/13-7/14. The portfolio I built for her was more conservative and also paid about 3% average in dividends. I find Saul being a bit more aggressive and searching out the higher growth companies and investing only as long as that growth continues quarter by quarter. With my kids, I am leaning towards a solid base of 20-25% dividend payers and 75-80% RB and high growth.

KLVanLiew

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Quillnpenn,
great outcomes from a specific method. I certainly desire my method to generate those kind of results. I don’t understand the charting technicals that you use. Would the returns on the investments in GMCR and SBUX that you referenced have been increased of reduced by trading or not trading around the ‘crossings’? The reasoned paths of saving and investing can’t help but be of a benefit for the future.
Here’s to the wealth of your grandkids,
KLVanLiew

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D.,
thanks for the input. Stay the course and reap the benefits. I am sure your daughters will thank you as the quality of your investment choices, all be they conservative, will certainly turn out just fine. We own some of the same companies, maybe our kids will run the places some day.
KLVanLiew

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re: XOM, SCTY

Event though I own a 2014 Tesla Model S P5, I now save lots of money by NOT buying gas or oil anymore, but, I put the monies into the Grandchildren’s XOM Perpetual Income portfolio. Next, researching Solar City (SCTY) for the long haul.
http://stockcharts.com/h-sc/ui?s=SCTY&p=W&b=4&g=…

For those interested in adding XOM to your childrens portfolio, peruse the below at your leisure.

http://cdn.exxonmobil.com/~/media/Reports/Outlook%20For%20En…

Best regards,

Quillnpenn -

http://www.dividend.com/dividend-stocks/basic-materials/majo…

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