The 2 Long Term Stocks I’d Buy My Son With $2,000

I receive a fairly regular flow of questions about stocks and stock ideas, and especially what I think about the long term prospects of stocks. That’s a good thing, because the long term stocks are always the main game for strong returns. Having said that, my style of investing means taking profits where I can find them, whether in long term stocks or short term opportunities.

I got a question the other day which is common to see online from people starting out in the stock market. In some forums, I see very dangerous answers essentially implying speculative microcap stocks are a good bet for the long term. So I thought I’d take the opportunity to give my thoughts on the scenario one reader described to me recently.

Looking to invest $2K each for our two children aged 12 & 13,” he wrote. “Will transfer shares to them at age 18.  Not interested in managed funds.

Now this is not intended as advice for anyone else, but unsurprisingly, I actually have asked myself a similar question, since I plan to do the same for my own child. So I’ll share my own thoughts on the subject. I’d be interested in hearing what other investors do, too.

My ideal investment is a buy and hold investment, but in practice, there are only very few companies that I have held for half a decade or more (though they have often made up a very large part of my portfolio). When thinking about buying for children, I prefer prioritise protecting the downside. That means I’m looking for a situation where it is extremely likely:

a) The company will be worth more in 5 to 20 years, and;

b) The share price will be higher in 5 to 20 more years.

Now, in my own personal portfolio my largest holdings are (in my opinion) set to do very well over 5 years, as businesses. However, sentiment can change and if their outlook starts to darken, the share prices may not do so well because expectations are already quite optimistic. Therefore, when I invest for my child on his birthday each year, I buy him a single share of Alphabet Inc Class A (NASDAQ: GOOGL), instead of one of the fast growing small-caps I prefer. 

The basic reason for this is that I think that the Google business will keep improving for a very long time, and that capital will continue to push the share price to similar multiples of earnings that it trades on today. I don’t see a great deal of valuation or business risk, so it’s a safe ‘set and forget’ investment for me to make for him.

However, if I wanted to spend $2k each on two children I would not be able to afford one google share each, at the current exchange rate, because $2k Australian is only US$1318.80 and an Alphabet share costs just over US$1400.

So with that as my budget, I would probably go with Microsoft Corporation (NASDAQ: MSFT), which has a lower share price of $185.66. I like Microsoft almost as much as Google, and I’m actually considering whether I should buy some Microsoft shares instead of Alphabet shares for my kid’s next birthday, just to add some diversity.

My thinking around these two companies is simple. They both trade on P/E multiples around 30 and have extremely long runways as they continue to grow. Google is much maligned as “merely advertising”, which totally misunderstands the difference between an online periodical or content creator (which is actually merely advertising) and Google, which is actually a monopolistic rent seeker. The reason for this is that (for certain competitive industries) google is almost essential for any challenger brand. Therefore, google advertising is a rent seeking exercise with a marginal value to almost all consumer facing companies. For example, while netflix does not need to advertise on google in Australia, challenger Stan does — for its own name!

Meanwhile, Microsoft is similarly rent seeking as a ubiquitous platform. I am currently writing this in google documents, because I consider it far superior to Microsoft Word. However, I nonetheless pay for Microsoft Office so that I can collaborate on Microsoft Word with other people. In enterprises, this impact is even stronger. 

Finally, and unusually for large companies, I feel good about the impact Microsoft and Google have on the world. The former was founded by one of the greatest philanthropists on earth and the latter has done more to make information available to anyone than any other company on earth. I can’t say the same about Amazon and Facebook, for example.

However, if I was limited to buying instruments traded on the ASX, I would probably just buy the Betashares Nasdaq ETF (ASX: NDQ), which is an exchange traded index fund of the US Nasdaq Index. It should match the return of the Nasdaq, which I suspect will be satisfactory.

This post is not financial advice, and you should click here to read our detailed disclaimer.

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