Bought stocks for my kids 13 years ago

My older son had a stock picking competition when he was in middle school. That was the year 2010. That competition gave each student a virtual cash account to invest in stocks, bonds, and ETFs. Whoever made a portfolio that performed the best over a 10-week period would win.

I didn’t think it was the best way to teach young kids how to invest. That spurred me to set up a different kind of stock investing experience for them. Something that would emphasize value of long-term investing and power of compounding.

I have two boys, five years and one month apart. Over the following five years, I gave my sons about $500 each in form of stock shares as birthday gifts. Once a year, usually in October–December time frame when they had their birthdays.

I told them the money would be theirs once they’d graduated from college. Until then, it stayed invested in the stocks we pick. [For the record, their mom continued to give them real birthday presents every year.]

That started in 2011 and lasted until 2015. Each year, I would give them a short list of candidate stocks to buy from and let them pick one. I’d then buy roughly $500 (remember no fractional trading back then) worth of shares each, usually in October. I don’t remember why I bought two stocks for them in one year (2014). But I must have. Because I tracked all transactions through two separate Quicken portfolios.

But I didn’t buy the shares in their accounts for they were underage for own brokerage accounts. I’d just buy in my account. I still have those shares today, comingled with mine.

My idea was to give them stocks of companies they can relate to. And then let them monitor the portfolio over the years. I was hoping it would grow nicely, building up to a nice sum by the time they graduate.

Among the stocks they had picked were a game maker (Activision of Overwatch and CoD fame), a phone maker (Apple), a restaurant chain (Chipotle), a theme park owner (Disney), a soda company (Coke), and two e-commerce giants of the time (Amazon and eBay). Those were familiar names and good businesses too.

Though I encouraged them to pick different stocks from my short list, both usually ended up selecting the same business each year. Except for one year when one went with Coke and the other picked eBay.

This December, my younger son graduated from college, five years after our Numero Uno. I am about to start transferring those stock positions to them. I plan to spread them over the next two tax years to stay below the annual gift tax limit.

So, how did those positions do over the years? In absolute terms and relative to the broad market? See the tables and charts below. I grouped the results under Portfolio A and Portfolio B (one for each) even though they only differ by one stock.

As you can see, both portfolios have performed very well. Since 2011 when the first purchase was made, annualized rates of return (including dividends) has exceeded 18%. $3K invested during those five years has turned into $23K today, more than 7x higher. Same cash invested in a S&P 500 index fund would have resulted in about $17K today.

Six stocks were purchased for each portfolio over the five years. Four of them easily outperformed the market while the remaining two lagged considerably. All these companies have been well covered on this blog site. These are mostly the same companies that I own myself in my portfolio [1 & 2]. One exception is eBay that has only been a minor position for me.

Since the positions were bought, several of these stocks went through changes. Activision Blizzard was bought out by Microsoft for cash in 2023. [The tables above assume I didn’t buy another stock with that cash.] Apple stock was split 7-for-1 in 2014 and another 4-for-1 in 2020, reflecting great stock appreciation in that period. Same was the case with Chipotle that split 50-for-1 last year. Amazon, the best performer of the lot, also split 20-for-1 in 2022.

Those were the outperformers. There were three laggards too: Disney, Coke, and eBay. They hadn’t kept pace with the broad market. eBay spun off its payment/wallet division PayPal in 2015. Hence, Portfolio B above includes both stocks. Disney was the real laggard with just 4.4% IRR in ten years. Coke did a bit better than eBay/PayPal combo though it also lagged the market.

These two portfolios were indeed treated like “coffee can portfolios”. Just like the old days when valuables were stashed away in coffee cans. Once the initial purchases were made, those positions remained untouched since then. I didn’t reinvest dividends, nor did I buy or sell another position. Other than once a year report generated in Quicken to share with the boys, I didn’t take any other action. I didn’t consider selling laggards either, nor did I worry much about one highflyer stock that crashed 80% off its peak in 18 months (PayPal).

With the hindsight, it’s clear that I could have done even better if I had sold off some laggards in a timely manner. Easier said than done, though.

But that was not the goal here. My objective was not to beat an index. I was aiming to show my kids the power of compounding over the long run. Even if their portfolios had not beaten the stock market, they would have still reported great outcomes. More than 5 times the original investments in 13 years if I had just invested in a plain vanilla S&P 500 ETF.

Benign neglect is what I practiced with my kids’ portfolios during those years. It had worked for me in an earlier period (1992) when I was dollar cost averaging in a 401-K for twenty years. It worked again here. True to this old investing adage: It is time in the market, not timing the market, that counts.

Warren Buffett once described his investing style this way:

Benign neglect, bordering on sloth, remains the hallmark of our investment process.

But benign neglect does not mean blind negligence. Buffett’s strategy could be better described as active selection followed by benign holding. He is a stock picker, not an indexer, and his success is built on a foundation of deep, non-neglectful work. But once he has picked his stock, he prefers to just hold on to it for long periods of time. This is what I did here too: Let them pick stocks from a carefully vetted short list and just hold on to them for years.

My hope is that the results from this exercise will encourage my boys to become patient long-term investors. After all, investing is a marathon, not a 10-week sprint.

Those among us who are not stock pickers, you could also follow the same investing process. John Bogle, the founder of Vanguard and a pioneer of index investing, was a staunch advocate for holding index funds for long periods. He used to say: “buy the haystack, not the needle.”

“The winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing. Just stay the course.” –John Bogle