Best Stocks to Buy

3 Stocks for Your Kids, 3 Stocks for You?

I'm a big believer in the idea of putting together a personal list of the best stocks to buy.

The list doesn't need to be that long either - in the page I wrote on what I considered to be the problems with diversification, I made the case for a concentrated portfolio, providing you've done your homework and chosen your investments with care and, most importantly, are willing to make adjustments when conditions materially change.

Best Stocks to Buy for Kids

In the interest of exploring the topic further, I'd like to share an epiphany I had on a related topic - determining the best stocks to buy for kids. Specifically, the epiphany I'm talking about occurred when I was reflecting on the stocks I had selected for my own son's portfolio.

Some quick background: as I write this, my son is five years old (and, for the record, I understand now why most parents begin a family when they're younger) and owns shares of just three individual companies in a custodial account - MCD, PG, and PEP.

As a self-directed investor who is very critical of the mutual fund industry and the John Bogle index fund crowd, I'm comfortable with a concentrated portfolio, although I admit that holding just three stocks is a very concentrated portfolio indeed.

Advantages of a Concentrated Portfolio

Instead of going into great detail about why I selected these three stocks, I would instead like to share my rationale for why I chose to limit the number of companies to three in the first place.

I actually put a lot of thought into setting up his concentrated portfolio. In my mind, there are some important advantages:

Not too many businesses for him to track
Still provides plenty of opportunities to learn first hand criteria for successful long term investing
Allows room for expansion as he matures and learns to make his own selections

Regarding why I chose these three specific companies, without going into all the details and criteria I focused on, suffice it to say that for me personally, at the time I write this, these are my own three favorite businesses to own.

Every self-directed investor will have his or her own list of the best stocks to buy, of course.

In fact, in a sort of fun coincidence, I came across an online comment on another website a few days prior where another self-directed investor listed his own three favorite stocks - MCD, JNJ, and KO.

The Core Stock Epiphany

As I write this, my own personal portfolio is fairly concentrated itself with 11 current positions (including MCD, PG, and PEP). I also have a "candidate list" of an additional ten or fifteen businesses that I would also like to own at some point in the future.

I always assumed that I would probably eventually max out at around 20 different stocks. And, in my opinion, if I do my homework and invest in 20 individual high quality businesses, that's more than enough diversification.

In my experience, most self-directed investors end up with portfolios consisting of 10-20 individual stocks. Some go higher, but the consensus seems to be that after 20, it starts to get time consuming monitoring them all and staying informed.

So here was my epiphany - if I've set up my son's account to include what for me are the 3 best stocks to buy, do I really need another 17 stocks in my own portfolio?

Don't get me wrong - I'm not going to limit myself to only owning those 3 stocks. But at the same time, I realized that I needed to remember why I chose them for my son in the first place. And if I really did believe (both objectively and subjectively) that these were the 3 best stocks to own, then they should probably comprise a much larger portion of my portfolio than they currently do.

So now my long term goal is to make these three stocks my core holdings and have them comprise a full 50% of my holdings.

Now you may or may not be comfortable having that concentrated of a portfolio yourself. But at the same time, don't undercut or sabotage yourself by stifling your own best investing ideas.

And, in my defense, I do have some good company - I remember hearing this Charlie Munger quote from a Berkshire Hathaway annual shareholder meeting a few years back: "No one ever got rich diversifying."

Learning How to Invest from Our Kids

The process of this epiphany led me to another kind of weird or ironic thought - that we can learn a lot about investing simply by listening to ourselves as we try to teach our kids about investing.

[And that's true for just about any topic we care about.]

Now we all know that kids don't always listen or appreciate the hard-earned wisdom we try to impart to them. And it can be frustrating when they don't.

My advice is to be patient - at some point they'll eventually be more receptive. Or, more likely, they'll gain their own hard-earned wisdom.

And just because others aren't always appreciative of what we have to offer, doesn't mean we have to follow suit. We shouldn't undervalue ourselves or take what he know for granted.

In fact, in a world where so many people are willing to just sleepwalk through their existence, I think it's important to periodically take a step back and recall the areas of our lives that we've committed to improving.

And then pat ourselves on the back.

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