Discovery Investing: Investing in Your Child's Future

Michael Berry
0 Comments|August 28, 2006

Stock picks for the surging cost of education



Stock picks for the surging cost of education

Hot on the heals of my flagellation of "true believers" in Morning Note 1 I note, this morning, that Newt Gingrich , a former professor at West Georgia College is complaining. He is decrying the cost of a college education. This is a topic about which I have not written much. However, if inflation were ever evident in our western society it is evident in the cost of a college education.

My father was a child of the Depression. He was the oldest of nine children - born in 1912. When he was in high school, at 18 years of age, he was forced to quit school to help support the family. He learned to be a carpenter, electrician, mason and, in general, a very handy, handyman. He never forgot his experience. He never had the opportunity to complete a college education. The Depression stood firmly in his path.

More than any other objective his primary life goal was that his children should have the opportunity of a college education. He succeeded in achieving this goal.

I remember my college education. I attended the University of Waterloo. It was a rigorous and superb education. I received a Bachelor of Mathematics in 1969.

My tuition was about $500 per year. Books and supplies were additional costs as was my living expense. During the summers, I worked as a co-op student first at London Life Insurance Company and later at 3M Canada. In the evenings, I umpired fast pitch softball in the small communities of southwestern Ontario. It was great fun and I distinctly remember earning enough to pay my tuition expenses. Umpires were then paid $5 per game plus traveling expenses.

Those economics are no longer the case. It is virtually impossible for a young person to self-finance their college education today.

Mr. Gingrich points out that, "Today, the average price of tuition at a public university has ballooned to more than $12,000 per year and private colleges now average $29,000 per year. Some reach as high as $40,000 or $50,000 per year."

Today's undergraduate is often saddled with debt, he points out, of up to $100,000. This explosive financial burden is borne not only by the student and his or her family. It is also borne by the taxpayer. Taxpayers subsidize public education to the tune of tens of billions of dollars each year.

This is where I believe Legacy and Discovery investing can come into play. If your children, or grandchildren, are young you might consider setting up a 529 Deferred tax college plan. A 529 College Savings Plan is a state-sponsored, tax-advantaged savings plan that can help families and individuals save for higher education expenses. These plans offer a number of benefits including tax-deferred growth and federal income tax-free withdrawals for qualified expenses. This federal income tax-free treatment of qualified withdrawals and other federal tax benefits are now permanently in place for 529 plans through the passage of the Pension Protection Act of 2006.

Qualified expenses include tuition, fees, eligible room and board, books, supplies, and required equipment for attendance at a higher education institution.

In addition to the federal tax benefit, many states offer a state income tax deduction for contributions to their plans as well as state income tax-free withdrawals for qualified expenses.

Many states have self-directed plans and you can put as little as $25 in the "kitty." Just think what 10,000 shares of Western Copper (TSX: T.WRN, BullBoards) purchased for $0.42 in 2002 would have done for your grandchildren. In four short years, that tax free Legacy appreciated to US$290,000. This is the power and the essence of Discovery and Legacy investing. Please take advantage of it. It is a no-brainer. The key is to build a small portfolio of high potential discovery stocks; oil and gas, biotech, metals, ethanol, nanotech or water. You choose.

Remember the other key to Discovery is to allow the time for the Discovery to be discounted into the share price. It seems that the onerous cost of today's college education is almost the perfect application for the long-term discipline of Discovery Investing. Here are a few names to pique your interest; Quaterra (TSX: V.QTA, BullBoards), Bravo (TSX: V.BVG, BullBoards), Energy Metals (TSX: T.EMC, BullBoards), Derek Oil and Gas (TSX: V.DRK, BullBoards) and Senesco Technologies (AMEX: SNT, BullBoards). I also like the chances for DeJour (TSX: V.DJE, BullBoards), Kenrich (TSX: V.KRE, BullBoards), Polymet (TSX: V.POM, BullBoards), CanWest (AMEX: BQI, BullBoards) and Glamis (TSX: T.GLG, BullBoards).

There is little to lose and everything to gain for your loved ones.

Michael Berry has been a portfolio manager for both Heartland Advisors and Kemper Scudder, where he successfully managed small and mid-cap value portfolios. He was a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia and has also held the Wheat First Endowed Chair at James Madison University. Dr. Berry is now a proponent of what he calls "discovery investing."


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