10 First Stocks To Buy A 10-Year-Old: Start Investing Early – Seeking Alpha

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As a financial practitioner and educator, I strongly believe that financial education needs to start earlier and be a more core part of the education of more children from an earlier age. As a financial planner and investment advisor, I am also often asked by parents how best to turn hundreds of dollars per month of savings into hundreds of thousands of dollars in a decade or two for college tuition and fees. As father of a 10-year-old who both likes math and is curious about how the world works, I am blessed have the opportunity to practice both at the same time in my own family and share what I learn firsthand with others.

Saving and investing for a future goal can easily and effectively be done by regularly buying index mutual funds or ETFs, and there are definitely far worse things you can do than invest an elementary school child’s college savings in a low-cost index fund, but I earlier explained why I prefer directly owning the stocks in an index rather than simply buying an index fund. I remember back in 1999 a 10-year-old caller to Cynthia Oti’s radio show “Financial Fitness” asking “what one stock should I ask my parents to buy for me?”, to which Cynthia replied “ask them to buy you a ‘diamond'”, which she explained as the SPDR Dow Jones Industrial Average ETF (DIA). A curious 10-year-old seeing any financial news on TV is likely to see or hear about the Dow, and fortunately the Dow Jones Industrial Average is one of the easiest stock market indices in the world for a 10-year old to understand, given its price-weighted (one share each) composition of only 30 well-known stocks. I explained in another earlier article why I believe the Dow is still a relevant benchmark to follow, even though larger portfolio managers and traders have moved on to the broader and more complex cap-weighted S&P and Russell indices. If a 10-year-old spent a little time reading a bit (say from annual reports) about only one of the Dow components each month, that student would learn an enormous amount about business and the American economy by age 18.

To make this task more organised and interesting than simply reading about all 30 Dow components, I put together the following list of 10 stocks, in order, that I believe make a good “first 10” starter investment portfolio a student can read about, experience, and accumulate over time. Note that I call these the “first 10”, to distinguish them from the “biggest”, the “best”, the “cheapest”, the “fastest growing”, or other superlatives that might be used to sort and select stock lists (the Russell, for example, could be described as the “biggest 1,000”). In building this list, I considered the following:

  1. First, I looked for a sequence of business models that are relatively easy to understand. This meant starting with a simple and well-known consumer product to introduce concepts like cost of goods sold, with each subsequent company introducing at least one new and different business concept.
  2. Second, I wanted to make sure the 10 stocks were in 10 different industries to introduce the idea of sector diversification, while showing that these businesses were still related to each other enough to leave residual correlation.
  3. Third, I preferred companies with relatively easy-to-read annual reports. I would encourage the advanced students to regularly check the latest filings on Edgar for reports they like reading, but for beginners, I would start by reading the latest annual report for each of these 10 companies in order.

Notably, I did NOT consider factors like valuation in putting together this list, as one of the points I expect the student to start learning on their own, after understanding how each business works, is whether to decide at what price a stock is fairly valued.

10 is a great age to start investing because in many schools, that is when I’ve seen math lessons finish covering addition and multiplication of fractions and decimals, which I might argue is just about all the math you really need to get started in fundamental investing. With the collapse in stock trading costs to almost zero and availability of information online, there is little reason minors with a UTMA/UGMA or 529 account should not start accumulating positions in a portfolio of businesses that can grow both their wealth and financial education. Ideally, the first 10 stocks they own would be ones they could hold for life and eventually collect dividend payments larger than their initial investment from, but I even recommend diversified direct stock portfolios for a 10-to-15-year college savings time horizon, and have long criticized 529 plans for requiring savings go through relatively restrictive and obfuscating fund plans instead of direct stock plans.

So in order, here are the first 10 stocks I would guide a 10-year-old to start owning at the beginning of a lifetime of learning about investing:

#1: Coca-Cola (or PepsiCo)

Coke (NYSE:KO) may be one of the most obvious first stocks for a child to own, because it is a brand any child reading this is almost certain to know with a business model easy enough to understand. In Bill Ackman’s wonderful educational video “Everything you need to know about finance and investing in under an hour,” investing in a business is introduced through the example of a lemonade stand, and later Bill also mentions The Coca-Cola Company by name as a company you would want to own forever.

Reading the income statement, balance sheet, and cash flow statement on KO’s annual report is a hands-on way to introduce the basics of business and accounting to a 10-year old, starting with the concept of cost of goods sold, for example how it cost Coke $16.5 billion to produce product it sold for $41.8 billion.

In addition to the basics of the high gross margin secret formula, KO might also be one of the easiest stocks around which one might structure an almost complete MBA curriculum around marketing, finance, and perhaps one of the most important concepts in business: distribution. Coca-Cola has several separately listed bottlers in different parts of the world where it sells its beverages, and one can spend plenty of time learning about all these different networks by studying all these different bottlers, as this article does for the ones in Latin America. KO’s simple core business model and satellite bottler/distributor model are the main reason I chose this beverage maker as a first stock rather than a more complicated food and beverage franchiser like McDonald’s (NYSE:MCD), which has also been included in stock lists for kids.

Disclosure: I bought shares of KO for my 10-year and shares of PepsiCo Inc. (PEP) for my 6-year old because I also wanted to personalize their motivation to understand competition between brands and businesses. I don’t expect the 6 year old to read any annual reports yet, but this interest and motivation already makes it interesting.

#2: Amazon (or Alibaba)

Speaking of distribution, a second company students should spend time learning about is one with the ability to get almost any product in the hands of hundreds of millions of customers. Traditionally, I might suggest this second stock to be Wal-Mart (NYSE:WMT), but for this list I am picking Amazon.com Inc (AMZN), which has become the go-to place many customers in many countries buy not just books, but many other goods they used to buy from retailers. Another reason to choose Amazon over Wal-Mart is to motivate the young shareholder to learn about the evolving cloud computing and web services business. One of the big lessons here is the value of having a loyal customer and the cost of getting a new customer, which makes or breaks many businesses.

The main concept here: economies of scale, and the power of distribution.

While Amazon vs. Wal-Mart seems like the big retail fight in the U.S., I would say the real distributors’ equivalent of Coke vs. Pepsi is Amazon vs. Alibaba (NYSE:BABA). Alibaba dominates both wholesale and retail online shopping in China, and also has a cloud computing business, and is another world worth looking into for students curious enough to understand its ownership structure. Amazon also competes with Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS) in the media and content space, which is a main reason I do not also include Disney on this list (another name often on stock lists for kids).

#3: A real estate investment trust (REIT) or other real estate company

Moving past two big brands, a third investment any student should own is some form of real estate. While many investors’ first real estate investment is their own home, starting with smaller amounts in a real estate investment trust (REIT) and reading the annual reports not only provides more flexibility and liquidity, but practice on mortgage and rental yield math.

The concepts a REIT should teach revolve more around the balance sheet, how to finance an asset, and how to understand whether an asset like a building is generating a satisfactory return or can be improved.

I regularly scan over 400 REITs across 8 different global exchanges, but for this list I would recommend a relatively simple one: the Monmouth Real Estate Investment Corporation (MNR). Monmouth primarily owns industrial properties that it mostly rents out to a single tenant: FedEx (NYSE:FDX). This business is quite related to the theme of online shopping, and this REIT is simpler to understand than more diversified ones with more complex types of real estate.

Outside the U.S., one of my favorite non-REIT real estate names is MTR Corporation Limited (OTCPK:MTRJF), which runs the metro rail systems in Hong Kong and other cities, and also owns parking garages, shopping malls, and other real estate around those train stops. Reading MTRC’s annual report gives some insight into how transit access and property values are tightly linked.

#4: A bank

A fourth simple business model to learn is that of a bank. Kids may be less excited about saving money in a bank deposit that will pay them less than 2%, but should get interested in how simple and profitable it is to borrow money at less than 2% and lend it out at more than 4%, and how this form of credit has made the modern world as we know it possible. Rather than a mega-bank, I would start with a simpler and more local bank like Citizens Financial Services Inc (OTCPK:CZFS) in Pennsylvania. One reason I chose CZFS is because it has maintained a return on asset rate of over 1% for the past 5 years, which I have long seen as an important hurdle rate for banks, and I would encourage students to look into why this ROA has been declining in recent years.

Where I live in Hong Kong, the “local bank” is the global bank HSBC, which in an earlier article I explained could still be thought of as a local Hong Kong bank for a student preferring a bigger brand here.

The concept to be learned reading a bank’s annual report is how a bank’s business model, which is also simple to understand, is more similar to that of a REIT than to any company with a “cost of goods sold,” and to learn the terminology of how banks make money.

#5: An insurance company

Insurance is similar to banking in that both raise large balance sheets from their customers invested across a diversified pool of risks: on the asset side for banks and on the liability side for insurers. While it would be simpler to separate P&C from life insurance, I believe after studying a bank a student can handle reading about a diversified insurance company like Aflac Incorporated (AFL), which sells life, health and disability insurance in both the US and Japan, and is also listed in Tokyo under symbol “8686.T.” By being a shareholder in an insurance company from an early age, a student is less likely to be uninsured, underinsured, or buy the wrong type of insurance (like buying a high-commission whole life policy) as an adult. One important sector of insurance is medical insurance, which pays the revenue of the next stock.

Concepts to be learned from Aflac’s annual reports build on those learned from the balance-sheet-based businesses of the bank and the REIT, while introducing the premium-vs.-claims model and risk management of an insurer, and in Aflac’s case, how it balances its U.S. businesses in dollars with its Japan business in yen.

#6: A health care company

Health care is a trillion-dollar industry that includes clinics and hospitals as well as equipment makers (from stethoscopes to MRIs) and the spectrum of drug and biomedical engineering companies from the generic to the cutting edge. Though it may be less common for parents to hope their children will grow up and become doctors, I have often said that owning healthcare businesses is the most natural hedge to long-term rising healthcare costs. In this sector, I’d start with Mednax Inc (MD), which runs a network of over 3,600 physicians focused on neonatal care.

Here, a student will build on what was learned with Coke and Amazon, but shifting to a business that is service- rather than product-oriented, more locally dependent, and generally non-discretionary.

#7: A defense contractor

National defense is another “public good” service that consumers do not willingly shop for and are generally price-insensitive to. One reason students should own a defense contractor is to be better vested in the understanding of this part of the political and government procurement process and how it shapes power in today’s world. Here, I am personally biased towards Lockheed Martin (LMT) in part because, like many other American boys, I grew up fascinated by the SR-71, and only later learned how the government decided how many of them to pay for.

Owning Lockheed introduces a company whose revenue has a far longer sales cycle and depends on a far more complicated purchasing process than that of customers who buy a Coke or a book on Amazon.

#8: An oil or energy company

Related to defense, oil is another industry related to geopolitics and understanding difficult decisions in far away and dangerous places. Although today’s children may see a gradual shift towards more renewable energy in the coming decades, oil and gas are the here and now of today’s energy world, and an industry in which to learn more about the world. Here, I start reading about the PetroChina Company Limited (PTR, also listed in Hong Kong as “00857.HK” and in Shanghai as “601857.SS”), as energy politics is a critical part of China’s growth story.

PetroChina’s 2016 annual report is long at 280 pages, but a worthwhile read for 10-year-olds on their 8th stock ready to learn how the 21st century’s greatest economic growth story gets its energy.

#9: A utility

Perhaps more boring and close to home than most of these stocks so far, utilities are the defensive and dependable companies that power the computer, tablet, or phone on which you are reading this (or the printer than printed it out for you). I get most interested in utility stocks when the market is getting most excited about sexier growth stocks and they are the relatively well-valued place to earn dividend income and ride out a downturn, but choosing a utility stock also means choosing the local area it serves, usually with electricity and/or water. Sticking around East Asia, I would point a student to look at KEPCO, which stands for the Korea Electric Power Corporation (KEP).

KEPCO’s 2017 annual report is relatively short and heavy on graphics, and by itself provides a very colorful and global picture of this utility. The homework assignment here is to find out why KEPCO stopped paying dividends, as utilities are often known as defensive stocks often purchased for their dividends.

#10: Berkshire

Last, but certainly not least, is a student stock recommendation that may seem like a bit of a cop-out: Warren Buffett’s Berkshire Hathaway Inc (BRK.B). I deliberately put this unique stock at the end because I believe a shareholder best appreciates the quality of Berkshire’s annual reports and Buffett’s annual letters only after having tried investing on their own in a few other companies and reading what other companies’ executives write. Berkshire is often categorized as a reinsurance company, but can be compared to Amazon as both being conglomerates of different businesses, but BRK.B has a much longer track record far more famously built with an emphasis on profits. Although even Buffett himself has recommended the average investor stick with low cost index funds, learning the Oracle of Omaha’s lessons can likely still prepare many diligent students to beat the averages.

Conclusion

This list was meant to name names and get 10-year-olds started in investing, not just with mutual funds, but by actually understanding the underlying businesses whose profits power those mutual funds. Plenty of students and fellow practitioners will disagree with me and debate which names and even which categories to include, but that is the point: having some understanding and appreciation of where your dollars go as a consumer and where they come from as an investor enlighten you on how the mutual fund sausages are made, and how to assemble a financial plate of the few simple ingredients better balanced for your financial diet. Forming these habits from an earlier age educates not only better investors, but better consumers, employees, managers, and citizens as well.

Disclosure: I am/we are long KO, PEP, MNR, PTR, LMT, KEP, BRK.B.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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