If you're considering the gift of stocks for a college student in your life this holiday season, think about what makes a good beginner stock. The best stocks for new investors are the ones they'll still want to own 50 years from now, when they're old and gray investors.
1. Berkshire Hathaway
Berkshire Hathaway had a disappointing 2020. It underperformed the S&P 500 index and sat on a record $147 billion in cash through one of the biggest stock market sales in history. But the reason to gift Berkshire Hathaway Class B shares to your college kid isn't to help them earn a quick buck in the next year or two. The goal is to give them a dose of legendary chairman Warren Buffett's investing wisdom.
Buffett has always told investors to look elsewhere if short-term profits are what they're after. He suggests only buying Berkshire shares if your holding period is five years or more. Becoming a shareholder in Buffett's company is the perfect way for new investors to learn that buy-and-hold strategy. Since 1965, it's delivered compounded annual returns just north of 20%.
One reason for its so-so performance in the past year is that aside from a few holdings like Apple, it's historically stayed away from tech stocks, which have caused the S&P 500 to soar recently. Its focus has always been on stalwarts in industries like financial services and consumer goods (think American Express and Coca-Cola) that obviously aren't going anywhere.
While 90-year-old Buffett seems to be yielding more stock-picking authority to investment managers Todd Combs and Ted Weschler these days, his annual letters to shareholders remain required reading for investors everywhere. Sure, they could read them on the internet with all the non-Berkshire shareholders out there. But his words will take on extra magic for younger investors as they learn how his philosophy is making their money grow.
College-age students are old enough to remember the days when you got Netflix primarily via red envelopes, but young enough that they probably don't remember a life without it. Because it's a brand they'll have lifelong familiarity with (along with the fact that its shares have skyrocketed more than 50% since January), Netflix is a stock that students will be thrilled to own.
The company finished its third quarter with 195 million subscribers, bolstered by people spending more time at home. Its shares have soared more than 50% year to date. CEO Reed Hastings acknowledges that growth will be slower in 2021, but there are plenty of reasons to bet on Netflix's long-term success.
While 195 million subscribers sounds like a lot, that's also less than 10% of global households. In fiscal 2020, it has nearly doubled its revenue in India, home to the fastest-growing over-the-top (OTT) video-streaming market in the world. Netflix has a vast fan base around the globe, with about 63% of subscribers living outside the U.S. and Canada.
Plus, its vast subscription base makes it easy to get a huge cash infusion with price hikes so small that most consumers barely notice. Even if Netflix doesn't add a single new subscriber in 2021, it will bring in an additional $2.3 billion by raising prices about $1 a month for most customers.
Given that movie theater attendance seems unlikely to rebound even post-pandemic, Netflix is a stock college students will want to hold long after they've donned their caps and gowns, even if 2021 delivers lackluster results.
3. Vanguard S&P 500 ETF
The Vanguard S&P 500 ETF is an exchange-traded fund, rather than a stock. It may seem boring, but it's a fabulous choice for teaching a newbie about the closest thing there is to a guarantee in investing.
Like any fund that tracks the S&P 500 index, Vanguard's fund will move in lockstep with the broader stock market. You can expect ups and downs, but an average year will deliver returns of about 10%. The amazing thing about investing across the index is that over a 20-year holding period, it's always produced positive returns no matter when you've invested.
An S&P 500 index fund is a great way for people who don't know much about stocks to start building wealth. (In fact, it's how Buffett believes the majority of people should invest.) Really, you can't go wrong with any low-cost S&P index fund here. But with its minuscule expense ratio of 0.03%, Vanguard's fund is a rock-solid choice.