TMO - My Newborn Son's Roth IRA And The Fabulous Wonders Of Compounding

2023-08-04 16:49:52 ET

Summary

• Time in the market and compounding interest are crucial for building wealth over time.
• Even average investors can build generational wealth through discipline and time in the market.
• I plan to open a Roth IRA for my newborn son and present a list of 10 stocks I am considering for his portfolio.

If you ask seasoned investors about the secret recipe for building a fortune, you will surely get a laundry list of answers, spanning the entire gambit of investment strategies, however, I absolutely guarantee that one common ingredient in each response would simply be time.

Time in the market and therefore, the wonders of compounding interest, can make an average stock picker appear brilliant and transform a family of modest means to wealthy, in the course of just one generation.

Time in the market, unfortunately, is not something you can correct later in life, it is not a skill, you are either in the market or you are not. The lightbulb goes off for each person at different times in their life to focus on investing for the future and it is, sadly, nearly impossible to catch up by investment results alone.

For example, someone who began investing at age 25 with $10,000 and contributes $500 per month averaging a rather average 8% annual return, would have $1,827,784 at age 65.

By contrast, if the same person decided to wait until age 40 to begin investing, that person would have $522,980 at the same age. Still a respectable figure, however, a whopping $1,304,804 less than our 25 year old.

To make this point a little clearer, for someone age 40 to achieve the same investment balance as our 25 year old by the time they were 65, they would have to achieve a rather unrealistic 15.45% annual return each year. Or to put this another way, our 25 year old would STILL come out ahead, by over $100,000, at age 65 even if he only achieved a 4% annual return compared to our 40 year old's 8% annual return.

Put simply, time in the market, in my opinion, is by far the most important factor in ones investing career, far ahead of stock picking skills.

My Newborns Roth IRA

With time being ones most valuable asset, both in the investing world and in life, I have decided to share the portfolio I have in mind for my newborn son, who was delivered just a few weeks ago.

I plan to open a Roth IRA for him in the near future, funded with $6,000 that he has earned from a photo shoot for my business. Each year going forward, I plan to invest his future earnings, up to $6,000 per year, directly into this account, my hope is that when he turns 18, he will continue on with this tradition. If he does and if I am able to guide him to an 8% return per year, he looks to have a very bright future financially.

Naturally, I have quite a few options to get him to the 8% return level, the simplest would clearly be the S&P 500 ETF ( SPY ). The S&P 500 has returned, on average 10.16% per year since 1926 so 8% over the next 65 years seems quite doable.

However, the stock picker in me wants to select a basket of 10 stocks that could perhaps outperform over the long run. Below, I have selected 10 stocks that I am considering for inclusion in my son's portfolio.

Texas Instruments ( TXN )

One of my absolute favorite long-term stock picks is this analog semiconductor giant. I simply cannot fathom a future world in which analog semiconductors are not a huge part of the picture. The company is entrenched throughout the world in key markets such as automotive, industrial, consumer electronics and communications. In addition, Texas Instruments has a long and storied tradition of maximizing profitability and returning cash to shareholders, just the qualities that I want to see for a holding in this portfolio.

Berkshire Hathaway Inc ( BRK.B )

I see ample evidence that Warren Buffet's baby will take care of my baby for decades to come, given the long-term focus of managers and the company's deep bench of talent.

Recently, the company, in my opinion, absolutely stole in terms of price a further 25% interest (75% total interest) in the Cove Point LNG facility from Dominion Energy ( D ) marking another smart use of capital by the Oracle of Omaha. With this diverse set of businesses, spanning insurance, energy, industrial, railways and more, I feel that the company is set up well, far into the future.

Alphabet, Inc. ( GOOGL )

The digital economy is latching its tentacles into every nook and cranny of our lives and the advent of AI only further increases the reach of computing giants. Alphabet has entrenched themselves into the digital economy through the household Google brand, however, I believe that the company's AI initiatives are vastly underrated. I expect big things from Alphabet over the coming decades, providing compounding far into the future.

Thermo Fisher Scientific, Inc. ( TMO )

Heath care technology is a sector that I see continuing to mature in the decades to come. Thinking about all of the great advancements just in my lifetime as a 41 year old man is remarkable, I cannot even imagine the advancements that my little guy will see in his.

Thermo Fisher is another example of a timeless compounding machine given managements skill for organic, profitable growth along with accretive acquisitions leading to consistent double digit earnings growth. I expect this trend to continue long into the future, leading to outperformance over the long-term.

Canadian Pacific Kansas City Ltd ( CP )

In my opinion, one of the great themes over the coming decades will be the onshoring of manufacturing that was once done in Asia, being brought either back to the United States, or to Mexico. The greatest beneficiary of this onshoring trend, at least in the railway world, I believe will be Canadian Pacific.

The company recently completed the long awaited merger with Kansas City Southern, creating what I believe is the most complete and efficient railway network in North America. Management is top notch and the moat here is huge and defensible and I see a pathway to double digit earnings growth for a very long time period to come.

Equifax, Inc. ( EFX )

Like it or not, credit scores and employment verifications are here to stay and are likely to get much more prolific into the future. Equifax provides a suite of tools for credit applications, employment verifications, fraud detection and other tools and is one of the three major credit reporting bureaus along with Experian ( OTCQX:EXPGY ) and TransUnion ( TRU ).

The company has recently embarked on a wide ranging international expansion evidenced by the recent agreement to acquire Boa Vista Services in Brazil, where credit markets are in rapid growth mode. I expect the company to post mid-teens EPS growth over at least the next decade making this company a solid addition to this portfolio.

Amazon.com ( AMZN )

Speaking of the digital economy, how in the world could I not include Amazon. The company, over the last few decades, has built perhaps the largest logistics network in the country, neck and neck with UPS ( UPS ) for the crown. In addition, the company's highly profitable AWS segment is the clear world leader in cloud computing.

Amazon also has been at the leading edge of AI, embedding it throughout the business. Given the entrepreneurial spirit of the company and the fact that they are not afraid to take risks, I expect the company to continue to lead from the front in multiple areas. I do not expect a smooth ride, however, in a long duration portfolio, Amazon is a must have in my opinion.

Mastercard Inc. ( MA )

This fintech behemoth is part of the duopoly with Visa ( V ) in the deeply entrenched payments space. Cash in the digital world is clearly a thing of the past and the business model of both Visa and Mastercard of taking a fee per transaction is truly a thing of beauty, so much so that the only worry that I have with either company is the government forcing them to cut the fees that they charge to businesses.

In the United States, the market is clearly saturated with cards, though still growing, however, the rest of the world is still in the early innings of the transition away from cash. I believe that Mastercard can capitalize on this opportunity. The company has shown itself to be a master in navigating difficult environments throughout its history and I believe mid-teens EPS growth is set to continue for quite some time for this fantastic company.

RTX Corp ( RTX )

The company, formerly known as Raytheon Technologies Corp, is one of a small group of defense majors in the United States. Unfortunately for my newborn son, I do see the potential for increased conflict around the world during his lifetime.

The situation in Asia, between the United States and China is likely to be a long struggle between the two and the result is likely to be a dramatically increased military budget for the United States and its allies. RTX Corp stands to benefit immensely from this friction. RTX has a long history of producing cutting edge defense technology and I believe that the company has the right focus areas of aerospace, intelligence and missile technology to compound at attractive levels going forward.

AbCellera Biologics ( ABCL )

First off, I am aware that this one is not at all like the rest of the blue chips on this list, however, I am truly putting my money when my mouth is with this one. I personally have roughly 10% of my net worth in AbCellera, mainly due to my very strong belief in the company's strategy to build the worlds leading antibody discovery engine.

Biotech, during my son's lifetime, is likely to see amazing advancements and I believe that AbCellera has a formula to contribute to these advancements along with providing shareholders with potentially incredible returns over the long-term. The company partners with biotech and pharmas to discover cutting edge antibodies using world class, proprietary technology. The partners front the research cost of the discovery and AbCellera in return is given a royalty position in the resulting drug, this business model is highly capital efficient and leads to extremely high margins on royalty income.

Thanks to their work during COVID-19, AbCellera is fully funded with over $800 million in cash, no debt and a further $220 million in grants from the government of Canada bringing its total liquidity to over $1 billion. The company has 41 partners and 177 programs under contract along with multiple internal "pre-partnered" programs and co-development deals and 9 molecules currently in the clinic.

On the Q2 conference call, the company cited major pharma executives who commented that AbCellera's work in high value emerging GPCR and T-cell engager candidates is "world class" and in 2025, the company will bring online in-house manufacturing, thus completing the end-to-end discovery engine.

This is a very long-term investment and I believe fits perfectly into this long duration portfolio.

Bottom Line

The awesome power of compounding is something that I absolutely feel compelled to gift to my newborn son. I began investing at age 12 thanks to my grandfathers purchase of a $50 savings bond for me and him explaining the basics of compound interest. That $50 gift from him was truly invaluable as it opened my eyes to the investing world for the very first time and I have never looked back.

If I can give my son a 12 year head start on my investment journey and when at an appropriate age, open his eyes to investing as well, I truly believe, no matter his stock picking skills, he will have a strong financial future ahead of him.

I look forward to your comments below, thank you for reading and good luck to all!

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