Creating a lasting family wealth that you can pass to generations requires careful planning and review. Very few businesses last 100 years. Adapting to changing economic and business cycles and updating business trends requires a stable management and a forward-thinking approach. Businesses have to adapt to change, sometimes even change their core business if the industry has matured. Only those who welcome and adapt to change are the ones who can generate lasting family wealth.
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Stocks that can create lasting family wealth
Investors fear management changes in a profitable business. They are right to be fearful, as a management change could change strategy and execution. Any change takes time to adapt and show results. There are several examples, like Intel and Apple, that collapsed after a management change. At the same time, there are examples like Bombardier and Advanced Micro Devices that revived after the management change.
The difference between the above companies is that Apple and Intel were profitable businesses, while Bombardier and AMD were nearing bankruptcy. The new CEOs changed the core strategy. A key learning from this was that if the strategy is working, don’t alter it.
Constellation Software stock
Constellation Software (TSX:CSU) stock dipped 26% since the sudden exit of founder Mark Leonard in September. Leonard will stay on the board and facilitate the transition of business to Chief Operating Officer Mark Miller. It is right for investors to fear the change. However, Miller clarified there will be no change in the strategy. They will keep doing what they have been doing best.
Moreover, Constellation’s robust business model works around the concept of compounding. Every new acquisition brings a fresh stream of free cash flow. Over the years, this stream has diversified across verticals, geographies, and types of software. During the artificial intelligence (AI) boom, stakeholders were worried that AI might disrupt licensing software. Mark Leonard held a workshop to ease AI concerns, stating that they are watching the developments and will act after the AI impact is clearly defined. This shows Constellation’s practical approach to software.
Constellation Software is a good stock to buy and hold as the management is monitoring changing trends. The management change has created a temporary dip, making the stock cheap from a valuation perspective. The stock is trading at an enterprise value-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 20.3, a level last seen in July 2016. Now is the time to buy this growth stock and reap the rewards of long-term compounding.
Technology ETF
Another interesting way to generate generational wealth is to invest in the market. The market ETFs that copy the market index automatically review the portfolio for underperformers and replace them with performers.
iShares NASDAQ 100 Index ETF (CAD-Hedged) (TSX:XQQ) replicates the Nasdaq 100 index. It has holdings in all major tech stocks from Nvidia to Microsoft. The ETF is a one-stop destination to benefit from all tech trends shaping the future, from artificial intelligence to space internet to autonomous cars.
As and when the tech trends drive the stocks up, the ETF benefits as the value of its holdings increases. For instance, the ETF’s top holdings have moved from FAANG stocks to names like Nvidia and Broadcom that are leading the AI wave.
The ETF will move in tandem with the market, diversifying your investments in high-growth stocks while taking a 0.35% annual management fee from the portfolio value. A 10-year average annual return of 18% is pretty good for building generational wealth.
