In December of 2017, the world’s most perfect granddaughter was born in Chicago, thereby making me (if we go by the age my wife usually accuses me of acting) the youngest grandfather in the history of the world.
It was probably the only time I was happy about flying from Florida to the snow and ice along Lake Michigan, but it was hard not to burst into song as the plane came in over the frozen city that day. Thankfully I resisted that urge, as my voice is so bad it could easily be labeled as a threat to public health and result in me being in jail instead of holding my first grandchild.
Naturally, her parents and I have already had this discussion, and we have begun to position the “granddaughter portfolio” to help not only with college but her entire lifetime.
You may have a kid or grandkid, or you may just want to know how to secure a comfortable financial future.
Well, if this advice is good enough for the precious baby in my life, it’s good enough for you…
The 5 Main Divisions of the “Granddaughter Portfolio”
The first thing you have to understand is that we are not in any big hurry to put the money in. We have a lot of time to get this right, and this is not the greatest time to be throwing money at the stock market. Forward returns from these levels in stock and bonds are probably going to be crappy at best and horrid at worst.
The screens I run every week do not show a lot of long-term bargain opportunities, so we are willing to be patient and wait for an extraordinary opportunity.
In the meantime, I can talk about the five general guidelines that we will be using as we put the money to work on her behalf:
“Skin in the Game”
First, I am a huge fan of robust enterprises with the ability to survive that have high ownership by officers and directors. I am particularly fond of them when lousy market conditions create an opportunity to buy them at ridiculously great prices.
A portfolio of dividend-paying stocks with high insider ownership trading below the asset value of the company stocks, purchased near the 2009 market bottom and held since, has turned every $100 into $607 compared to just $380 in the S&P 500.
A third of the companies identified by this method have been taken over in the past nine years. High insider ownership often means a family-controlled company, and the only exit strategy for these folks is to sell the whole company. When that happens, we make as much as they do.
Private Equity Ownership
At some point, we will also be buyers of the publicly traded private equity firms. These firms are the very best investors, and we get to share in the results in two ways. First, they earn incentive fees on the profits they make for their investors, and these show up as earnings and dividend growth that help drive the share price higher over time.
Second, they all invest alongside the funds they manage, so the growth of these balance-sheet investments will increase the asset value and the share price of the publicly traded private equity firms over time.
She will own a lot of real estate by the time she comes of age and becomes the first female starting pitcher in the Major Leagues. I am often asked why I invest in boring old REITs when there are so much more exciting things to buy.
Here is the truth of the matter. I have no idea which one of the next big things will actually become a thing. I don’t think anyone else really does either. I do know that all these companies need to rent office, factory, and laboratory space. I know their workers need apartments near the company to live in. I know that their products will need to be shipped to a warehouse. All of these will require the writing of a rent check, and as an owner of boring old REITs, some of that flows into my pockets.
I also know that it is not rocket science to follow the real estate cycle. When nobody wants to buy high-quality properties during a recession, or credit is too tight for new building activity, it’s a pretty good time to be a buyer of almost all forms of commercial real estate. As long as we don’t have a full-on credit crisis, properly purchased property can never merely be sold. REITs have outperformed stocks since the tax laws were changed back in 1972 to allow for the creation of the industry. Reinvesting the dividends regardless of market conditions just adds to the already impressive returns.
She will also be heavily invested in renewable energy companies and projects by the time she heads off to begin her quest for a dual degree in physics and English literature. I am not a big “green” guy, but any idiot can see that renewable energy will play an ever-increasing role in meeting global energy demands. If someone finds the magic bullet that solves the storage and transmission issues associated with renewable energy, we could see something close to a 100% renewable world energy supply. I am not making that bet, but I am willing to make a 20-year date that building and operating renewable energy platforms will be a wildly profitable endeavor.
She will own a lot of infrastructure companies and projects by the time she turns in the Great American Novel for publication and solves Beal’s Conjecture over spring break. The American Society of Civil Engineers estimates that we have $4.6 trillion in infrastructure spending needs in the U.S. alone. Many more trillions will be needed to build and fix roads, bridges, airports, ports, subways, high-speed rail systems, water systems, and electrical grids around the world. The companies that do this work will make hundreds of billions of dollars collectively and see their stock prices skyrocket over time.
There is more to infrastructure than building and repairing. Once the money is spent, then owning things like airports, toll roads, pipelines, oil and gas storage facilities, and other critical infrastructure produces very high levels of cash flow, and we will invest in funds and partnerships that own these assets.
And there you have it – our general guidelines that will be used to build the granddaughter a fantastic portfolio. We may make some changes along the way, but skin in the game, private equity ownership, real estate, and infrastructure have produced some of the world’s wealthiest people, so we like the general outline for the world’s greatest granddaughter as well.
— Tim Melvin
Source: Money Morning