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Starting with nothing, could I realistically aim for a million? I think I could, for example by building a share portfolio. It would take time though, and I would also need to invest money to get there.
My success – or failure – would largely depend on what shares I bought and at what price. Some legendary investors like billionaire Warren Buffett have proven very successful when it comes to choosing shares. So rather than reinvent the wheel, I would apply the Buffett method to my own stock selection.
Getting money to invest
But first things first. Before I can buy any shares, I will need money to invest. That could be a lump sum. The bigger the amount, the faster I would hopefully reach my target.
Or I could drip feed money into a share-dealing account, or Stocks and Shares ISA.
How Warren Buffett chooses shares
Buffett does not invest in that many companies. In fact, I think that is part of the reason for his success. By focussing his financial firepower on a small number of businesses he thinks have outstanding prospects, he is able to get better results than investing in lots of merely good firms.
He sticks to his “circle of competence”, industries he understands, in which he feels able to assess commercial prospects. He then looks for some very specific characteristics.
One is strong customer demand that is likely to continue. That explains why he invests in Bank of America. The financial services sector is here to stay, in one form or another.
Then he looks for a competitive advantage that sets a company apart in its chosen field. That might be an iconic brand like Apple, a large customer base such as American Express or a unique product such as Coca-Cola.
The importance of valuation
But spotting a great business is only one part of the Buffett method. He also considers a company’s share price. Even a brilliant business can make a poor investment by paying too much for it.
Like Buffett, I consider what I think a company might earn in future and compare it to the price today, allowing for the fact that money becomes less valuable over time.
Targeting a million
Between 1965 and last year, Buffett’s company Berkshire Hathaway registered a compounded annual gain in per-share value of 20.1%.
Realistically, I do not feel I can expect to invest as successfully today as Buffett has done over the past half century. But imagine I can grow my portfolio at 10% a year in compounded annual gains. If I start with £100,000 today and add no further funds, I would be a millionaire in under 25 years.
What if I do not have anything to invest today? I could choose to put aside £100 each week to invest. Doing that, at a compounded annual gain of 10%, my portfolio could be worth a million pounds in 32 years.
That is a long time – but a big result. Buffett thinks about investing in terms of decades not years. Doing the same could help me build real wealth.
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