FTSE 100 stocks form the core part of my portfolio. And, with the pound weak, I’m looking less at non-UK listed stocks than I did this time last year. That’s because an appreciating pound could wipe out my gains.
Today I’m looking at how I could channel the wisdom of legendary investor Warren Buffett to reach millionaire status by buying just 10 different FTSE 100 shares.
Diversified but manageable
Buffett’s Berkshire Hathaway is a multinational holdings company — one of the biggest in the world — but it has a surprisingly small number of positions given its massive market cap — around $700bn. As of May this year, the firm has 53 positions.
That’s because Buffett likes to stick with what he knows. And this allows him to accurately assess whether a company is the right fit for his portfolio.
The FTSE 100 provides me with plenty of opportunity to diversify with a small number of holdings — perhaps just 10. The index is actually less linked with the UK economy that many people realise — with 75% of revenue coming from overseas.
Be like Buffett
Buffett focuses on intrinsic value. Intrinsic value is a simplified way of looking at assets or a company, and tends to ignore future fluctuations and other considerations. He’s essentially looking for meaningfully undervalued stocks. E.g. the market cap is below what Buffett considers to be its intrinsic value.
The so-called Oracle of Omaha searches for a margin of safety between the intrinsic value and the market cap. This is a good way to reduce the risk of losing money and could help achieve a higher level of return.
So, when scouring the FTSE 100 for stocks to invest in, I need find stocks that are meaningfully undervalued — this requires me to do my own calculations, looking at metrics like discounted cash flow.
Aiming for a million
Buffett has managed a 10.5% compound annual gain since 1965 in his time at the head of Berkshire Hathaway. That’s not bad at all, although, right now, with inflation around 10%, I’d be hoping for a bit more than that.
So, how could I aim for one million? Well, it’s hard to predict the future. But if I were to set aside £500 a month for three decades, assuming an average annual rate of 10%, I could hit millionaire status.
Choosing what to invest in could be the hard part. I want to find businesses that meet Buffett’s criteria, but each investment will require plenty of analysis.
Instead of investing widely, Buffett tells us to invest in a small number of companies that we really believe in. Berkshire Hathaway has almost three-quarters of its share portfolio invested in just five companies, including Apple and Chevron.
Looking at the FTSE 100, I’m starting by viewing UK banks. Buffett doesn’t go along with the crowd. And UK banks are certainly some of the most unloved stocks on the index.
Right now, the index is being hauled upwards by surging resource stocks. But shares in several sectors are trading at YoY discounts. As such, there are plenty of stocks for me to check out and apply Buffett’s criteria to.
