This is the third in a series examining how young savers can invest towards goals such as buying a first home and building a retirement pot, highlighting the best stocks, funds and ethical funds for them to pick.
Picking shares is a risky business, but it can be exceptionally profitable. Lewis Harding, a 23 year-old from Leeds, was able to buy his first car, a Vauxhall Corsa, with the super-sized returns from his first investments, in the shares of American cannabis companies.
“Cannabis companies were the first shares I invested in,” he said. “I was 19 and California was in the process of legalising the drug. The stocks got really hyped up – it was like an earlier version of GameStop.”
Mr Harding bought shares in Aurora Cannabis and Aphria, both recreational cannabis companies listed in America.
But after taking his profits to buy a new car, Mr Harding realised that following so-called ‘meme stocks’ was not a sustainable way to grow his savings in the long-term. “I just got lucky. I could have lost a lot,” he said.
Rodney Hobson, of broker Interactive Investor, warned against the temptation of following hyped shares. “You won’t make a killing every time,” he said. “Otherwise everyone would be fantastically rich. If you want big money now, buy a lottery ticket. But young investors have the benefit of time ahead of them, and they can grow their money in the long-term by investing in shares.”
Mr Harding, who is now training to be an accountant, has drastically changed his investment strategy since 2018. “I read all the books and researched online on YouTube. I studied all of the great investors: Warren Buffett, Peter Lynch and Bill Ackman,” he said.
Such is Mr Harding’s admiration for these investors that Mr Buffett’s company, Berkshire Hathaway, features as the top share in his portfolio.
Mr Harding holds 13 shares in his portfolio, accounting for just under 14pc of its value. The remainder is spread between “tracker” funds mimicking the performance of particular markets (41pc), private companies held through the funding platform Crowdcube (21pc), Bitcoin (7.6pc) and cash (16.8pc).
He said his investments in shares were relatively small given they were riskier than funds, which invested in multiple companies and so were more diversified.
Mr Hobson recommended that investors hold around 10 shares in their portfolio: enough to spread risk and few enough to keep track of.
Mr Harding picked his 13 shares by focusing on those trading at cheap levels, as well as those large, successful investors owned.
“I try to buy companies for less than what they are worth,” he said. “I also look at what big investors, like Lindsell Train and Fundsmith, own in their funds,” he added.
So far this strategy has served Mr Harding well. Since May 2020, Mr Harding has delivered a return of 32pc, far ahead of a meagre 2pc rise from the FTSE All-Share, a barometer for the British stock market. However, Mr Harding said he was disappointed not to have beaten the performance of the global market, up 45pc over the same period.
“I look for companies that are paying down their debt, buying back shares and buying other businesses. A perfect example would be Google-parent Alphabet or Facebook,” he said.
“They don’t pay a dividend because they reinvest their cash back into the business, and that means they can make great acquisitions. Take YouTube – Google bought it back in 2006 for $1.7bn. In 2020 it made close to $20bn in sales.”
For David Henry, of wealth manager Quilter, Alphabet was also a top pick. “Almost all digital advertising money goes to either Google or Facebook,” he said. “Google not only has established businesses like Android and YouTube: it has new technologies like Waymo, which specialises in autonomous driving,” he said.
Mr Harding also owns Facebook, mirroring star fund manager Terry Smith, who holds the shares in his £27bn Fundsmith Equity fund.
Despite taking a lead from the shares top investors picked for their funds, Mr Harding said he wasn’t tempted to invest in their portfolios.
“They are too expensive for me. And a lot of the time, active funds do not beat the market. I’d rather take my own chances, based on my own analysis,” he said.
Fast-growing technology companies like Alphabet and Facebook have performed spectacularly over the past decade, but Mr Hobson said young investors should supplement these with “dull and boring” shares too.
He pointed to British banks, which he believed were undervalued by the market. “Lloyds Bank in particular has not bounced back from the lows of the pandemic, probably because it makes most of its money in the UK and less from overseas than some of its rivals. But it should bounce back well,” he said.
The shares are up 31pc so far this year, but still trade around a fifth lower than their 2020 high of 57p.
Pharmaceutical companies could also offer young investors healthy returns over the long term, together with healthy dividends to reinvest into portfolios, he said.
Shares in AstraZeneca and Pfizer have risen 19pc and 15pc this year, buoyed by their Covid-19 vaccines, and yield 2.3pc and 3.7pc respectively.
These stocks should continue to deliver strong returns after the pandemic, said Mr Hobson. “The global population is ageing and there will be a growing demand for drugs,” he added. “If we do not get another pandemic, there are pharmaceutical companies that are going to do well anyway,” he said, also pointing to the medical equipment supplier Smith & Nephew.
The stock has suffered over the past two years, as Covid-19 disrupted elective surgery schedules across its core markets. But the company said in July that sales in its second quarter had grown by almost half to $1bn (£730m), suggesting a recovery could be underway.