Birthday Bonanza, Part 3

Hi, everyone!  As promised, tonight I’m going to discuss how to go about investing $1000 in the stock market for your child.

This is going to be a lot of information, so you may need to read it a few times.  That’s a good thing!  I read many pieces more than once and find that each time, I tend to learn something more.

So without further ado, here goes!

What should I invest in?

If you are looking to invest $1000 on behalf of your child , my recommendation would be to invest that money in one individual stock.

At this point your child is a newborn, or not much older.  Your goal over the next 18 years is to try and grow this investment as much as possible.

Mutual funds will not give you the potential returns that an individual stock will.

What kind of company should I look for?

There is nothing wrong with buying shares of Coca-Cola (NYSE: KO), Procter & Gamble (NYSE: PG), or Cisco Systems (NASDAQ: CSCO).  These are all members of the Dow Jones Industrial Average, and very stable companies.

When selecting a company to invest in for your child, however, I would look toward the future.

To maximize your return, you need to invest in growth – and I mean hyper growth.

Growth stocks tend to carry more risk.  But they also carry a greater return.

What are some characteristics of a growth company?

Here is a list of characteristics you should look for in a potential investment:

1. A company that is a disruptor.

A disruptor is a company that is changing the way things in a particular industry are being done.

Examples include Amazon (NASDAQ: AMZN), which disrupted retail, and Netflix (NASDAQ: NFLX), which disrupted TV.

2. A company that is a leader in an investment theme that has significant upside.

An example here would be a company like Nvidia (NASDAQ: NVDA), which makes general processing units (GPUs) for gamers.  This is a very fast-growing industry – and they have close to 80% of the GPU market.  Nvidia is also a leader in super-hot themes like self-driving cars and artificial intelligence (AI).  The company’s dominance in these two areas has been a major catalyst for the increase in its share price from $26 to $250 over the past five years.

3. A visionary leader who has the foresight to see new business opportunities before others.

Take Netflix CEO Reed Hastings, who made the decision to start streaming content in 2007.

At the time, streaming video wasn’t on anybody’s radar.

That’s what’s great about investing in companies with innovative leaders.  They have the ability to see, and create, the future that they envision, before anyone else can see it.

4. A company that has a high P/E (price/earnings) ratio and/or is labeled as overvalued in the media.

This goes against what most TV and newsletter pundits will tell you!

However…companies that are disruptive are game-changers.  Game-changers tend to have high valuations.  In other words, they are usually considered expensive by Wall Street.

Don’t let that keep you from buying shares in game-changing companies!

These are the companies whose stock price can go up 10, 20 or 30 times over an 18-year period – resulting, of course, in your $1000 investment going up as well!

What price should I pay?

Try not to quibble about the price.

We all want to own shares at the lowest possible price, but sometimes that is difficult to do.

I’ll give you a couple of real-life examples:

A few years ago, I purchased shares of Nvidia at $68. It had run up from $16 over the previous five years, and was already up four times in value.  To this date, the stock has continued to go up.  It has not come close to $68 again.

If I had waited for the price to go back down, I would either a) still be waiting to this day, or b) would have eventually bought the shares for a higher price.

Another stock I invested in was Splunk (NASDAQ: SPLK).  I purchased shares of Splunk at $68. The price dropped to about $56 over the next two to three months.  Then it proceeded to go to $120 per share!

Buy when you have the money.  Don’t try to “time” your investment.

When should I sell?

In a word…NEVER!

The whole purpose of this series is to encourage parents to purchase stock for their children at the time they are born, or soon after, in order to build wealth by their young adulthood.  For this reason, you should not remotely consider selling your investment for the next 18 years.

The reason why doing this is so powerful is that the stock market, over the last 100 years, has had an upward bias.  The amount of compounding that can take place over 18 years is significant.  (Remember…$1000 invested in Amazon back in 2001 would be worth $116,000 today.)

Once you invest your $1000, do absolutely nothing but be a spectator for the next 18 years.

More to come in the next segment!  For now, read and study this post.  Develop a short list of stocks that fit this profile,  Later this week, we’ll delve into how and where to open an investment account for your child.

 

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