To get the biggest return possible from an investment of £10k in the stock market today, I’d focus on picking the very best companies to invest in and I’d invest for the long term. This may sound obvious, but with a natural desire to see my money growing quickly and with so much ‘noise’ out there, it can be hard to maintain my focus. One way to make selecting the very best stocks easier is to ignore the macro picture, to shut out what’s going on right now with GDP, inflation and so forth.
None of us has a crystal ball. That’s why I see buying high-quality businesses as a less risky way of making a (hopefully) significant return on my money. So how do I do that?
Limit the downside
Warren Buffett is unequivocal when it comes to saying that investors should protect against the downside. He’s made a career (and a fortune out of doing) it very, very well. In practice, I take his advice to mean buying a company when its shares are reasonably priced, this could be after a recent slump, or the shares are out of favour. Or it could mean buying shares when the whole market falls. All this helps limit the downside.
Pick shares with high-quality features
Also, picking shares with the kind of past performance that show the business is high quality, I feel, reduces the chances of a portfolio underperforming and losing money. So I look for high returns on equity (ROE), high margins, and consistent revenue growth. Combined, a business that has a high ROE (say over 15), along with high operating margins (again 15%+), and revenue growth that has stood the test of time, ought to be a good investment, all other things being equal.
What I’d want to be sure of is that the past performance can be replicated in the future. The sweet spot would be finding a quality company that has little competition so should be able to maintain margins in an industry that’s unlikely to attract new competitors.
Strix and Facebook are examples of the kinds of companies that I think fit the bill.
Look to outperform the stock market
The last point when it comes to an investing process would be to make sure my portfolio can outperform the index, for example, the FTSE 100, or the FTSE All Share. To do this I’d need to ensure I have enough companies with growth potential.
The portfolio would need to include some shares that could multibag (increase multiple times over my initial investment), without adding excessive risk. This often means looking at AIM companies that are profitable and have decent balance sheets – those that have cash and a current ratio above two, for example.
It can also take the form of faster growing FTSE 100 companies that are growing revenue and profits well in excess of 20%.
So, I’d invest £10,000 in the stock market today by looking for high-quality companies that have an enduring competitive edge. It’s not easy, but it strikes me as the best way to outperform the market year after year.
