A wise graduation gift: Investing know-how

My fourth recommendation is leverage his intuition, experience and taste to determine the names of a couple of public companies whose products or services he's most likely to patronize frequently over the coming year. It could be a retailer, an electronics or apparel maker or a ski lift operator. But it must spark a passion and customer loyalty that is unsurpassed by peers. Kids know when a trend is going to be a home run, so they need to trust their instincts.

My fifth and final recommendation is to learn how to buy stocks and funds when they are fundamentally cheap versus their prospects. This is the hardest task of all, but it's a lot easier than hitting a curveball. As a rule of thumb, I'll tell him to try to buy stocks whose forward price-earnings multiples are lower than their estimated two-year growth rate, and preferably much lower. This gives him two ways to win: first when earnings growth advances faster than the market expects, and second when the P/E multiple -- which is the hidden lever behind stock prices -- rises in tandem with investors' increasing confidence in the firm.

If it looks like he will get with this program effectively -- and keep up a 3.75 to 4.0 grade-point average -- I've told him I will contribute regularly to the account every semester on an accelerating scale so that he can put a down payment on a home or seed a business by the time he turns 30 in 2022. This may sound generous, but it will actually be cheaper to do over time than in a lump sum 10 years from now.

If he's actually able to average 15% a year, which is unlikely, and hits all the GPA milestones, he'll have $100,000 -- and more importantly a lifelong habit of investing.

Fathers & sons: The $100,000 solution

School period	Date	Contribution*	Gain **	Total
End 8th	6/18/2007	$750.00		$750.00
Mid 9th	12/30/2007	$300.00	$56.25	$1,106.25
End 9th	6/18/2008	$300.00	$82.97	$1,489.22
Mid 10th	12/31/2008	$400.00	$111.69	$2,000.91
End 10th	6/18/2009	$400.00	$150.07	$2,550.98
Mid 11th	12/31/2009	$500.00	$191.32	$3,242.30
End 11th	6/18/2010	$500.00	$243.17	$3,985.47
Mid 12th	12/31/2010	$500.00	$298.91	$4,784.39
End 12th	6/18/2011	$1,000.00	$358.83	$6,143.21
Mid-Fresh	12/31/2011	$500.00	$460.74	$7,103.95
End-Fresh	6/18/2012	$500.00	$532.80	$8,136.75
Mid-Sophomore	12/31/2012	$500.00	$610.26	$9,247.01
End-Sophomore	6/18/2013	$500.00	$693.53	$10,440.53
Mid-Junior	12/31/2013	$600.00	$783.04	$11,823.57
End-Junior	6/18/2014	$600.00	$886.77	$13,310.34
Mid-Senior	12/31/2014	$600.00	$998.28	$14,908.62
End-Senior	6/18/2015	$1,500.00	$1,118.15	$17,526.76
Mid-Grad School Yr1	12/31/2015	$700.00	$1,314.51	$19,541.27
End-Grad School Yr1	6/18/2016	$700.00	$1,465.60	$21,706.87
Mid-Grad School Yr2	12/31/2016	$700.00	$1,628.01	$24,034.88
End-Grad School Yr2	6/18/2017	$700.00	$1,802.62	$26,537.50
Mid-Grad School Yr3	12/31/2017	$800.00	$1,990.31	$29,327.81
End-Grad School Yr3	6/18/2018	$2,000.00	$2,199.59	$33,527.40
Year 1 Work	12/31/2019	$5,000.00	$5,029.11	$43,556.50
Year 2 Work	12/31/2020	$7,500.00	$6,533.48	$57,589.98
Year 3 Work	12/31/2021	$10,000.00	$8,638.50	$76,228.48
Year 4 Work	12/31/2022	$12,500.00	$11,434.27	$100,162.75
	TOTALS	$50,550.00	$29,539.98

* Family gift through 2018; personal earnings through 2022
* 7.5% per six months

Now without any further ado, here is the portfolio that my son and I developed for his first $800 investment. It's a work in progress. I suggest that he review all of his positions, and rationales, at least once a month -- and make adjustments as necessary.

Exchange-traded funds

iShares Total Market (IYY, news, msgs). This is a great way to benchmark your whole portfolio and make a bet that small caps and midcaps will slightly outpace large caps over the next year.

iShares S&P Global Info Tech (IXN, news, msgs). This group has lagged the market for the past couple of years, but is just now rounding into favor. It includes all top tech companies, including Microsoft (MSFT, news, msgs), Intel (INTC, news, msgs), Google (GOOG, news, msgs), Nokia (NOK, news, msgs), Taiwan Semiconductor (TSM, news, msgs) and Cognizant Technology Solutions (CTSH, news, msgs). (Microsoft is the publisher of MSN Money.)

iShares S&P Global Energy (IXC, news, msgs). This group has outperformed for four years and will likely remain in favor. It includes all major global energy companies in all sectors of the business, including major integrateds ExxonMobil (XOM, news, msgs) and Total (TOT, news, msgs), services provider Schlumberger (SLB, news, msgs) and refiner Valero (VLO, news, msgs).

Stocks

His top choices for stocks were sunglass and apparel maker Oakley (OO, news, msgs), athletic apparel maker Under Armour (UA, news, msgs), fast-casual restaurant chain Chipotle Mexican Grill (CMG, news, msgs), iPod maker Apple (AAPL, news, msgs), media giant News Corp. (NWS, news, msgs) and snowboard and skateboard apparel maker Volcom (VLCM, news, msgs).

He will start with Oakley. Now trading at $25, our estimate for 2008 is that it'll earn $1.30 a share, about 15% more than consensus. At that price, the current price-earnings multiple would be 19. Contrast that with earnings growth around 25%, and it's a buy for a growth-at-a-reasonable-price investor.

His second choice is Volcom. Now trading at $48.80, we think it will earn $2.14 in 2008, or about 10% more than consensus. That puts the price-earnings multiple at 22. Contrast that with a 25% earnings growth rate, and it's good to go.

His other top choices are Apple and Chipotle, which I already own at much lower prices for him in his educational trust. Both are too expensive right now for new purchase. Apple you know about. Chipotle, well, when I wrote about the fast-food chain back in November, it was a screaming buy. But now its price-earnings multiple on our $2.58 estimate for 2008 is 33. That's too high for a company growing at around 25%, so we'll eat there but won't put any new money in.

I'll keep you posted on how the portfolio goes. And if you have any suggestions, let me know at my message board.

Fine print

Back at the start of the year, in my column on possible surprises for 2007, I mentioned that I liked tiny Fuel Tech (FTEK, news, msgs) for its technology focused on cleaning up emissions at coal-fired power plants. The stock got a big 17% boost on Wednesday after signing an agreement with a Hong Kong company to launch a joint venture in China. I said I was looking for a 70% gain on Fuel Tech this year, so we're now halfway there.

To learn more about iShares exchange-trade funds, visit their Web site. … To learn more about Volcom, visit it on the Web. … To learn more about Oakley, visit its Web site.

At the time of publication, Jon Markman owned Apple, Chipotle Mexican Grill, Microsoft, Intel and News Corp.

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