As a private investor with very limited funds at my disposal, is it realistic to dream of becoming a stock market millionaire? I think it can be and would happily aim for a million.
But my approach does not involve buying a wide range of shares and hoping that one of them turns out to be the next Amazon or Tesla. Instead, I would buy only a few different shares. Here is why.
Best of the best
Imagine that you win 20 restaurant meals in a competition. You are offered the chance to visit 20 restaurants one time each, or the best five of those restaurants on four different occasions. What would you do?
From the perspective of experiencing different places, going to all 20 eateries makes sense. But if you want the 20 best meals, of course the obvious choice is to limit your visits to the top restaurants.
Investing is like that, in my opinion. As an investor, my objective is to maximise my returns. So instead of investing in a bunch of companies I expect to do okay, or even quite well, it makes sense to invest in just a few companies I hope will perform spectacularly.
Even then, I will make some mistakes. But, hopefully, if at least some of my choices really do perform well, I can still aim for the sort of overall returns that could help me build a million over time.
In the footsteps of Warren Buffett
That is not just my opinion. It is also the philosophy of investing legend Warren Buffett.
Rather than being a purely theoretical approach, Buffett has put it into practice in his own investment choices. Indeed, at the moment, around three quarters of the share portfolio at Buffett’s company Berkshire Hathaway is allocated to just five shares.
Buffett’s reasoning is simple, but powerful. In the short term, a difference in performance between two shares may not lead to significantly different results. But as a long-term investor, Buffett realises that over decades, it can lead to massive outperformance. A marginal difference in annual performance can be significant when compounded over the long term. If the difference is substantial, the financial benefits can be even more dramatic for an investor.
Targeting a million
How much wealth I can build by investing depends on just two things. First is how much money I invest. The second factor is the return I can generate using that money.
If I seriously want to aim for a million, I need to be willing to allocate a decent amount of money to the effort, if not now, then at some point in future. Even Buffett is not going to earn a million starting with tuppence.
But crucially, I also need to make very good investment choices. Like Buffett, I think that means avoiding the temptation to buy into businesses I think are merely good – and wait for great. That is why I am hunting for great shares to buy now.
