Could I become a millionaire by investing in shares? Potentially the answer is yes, although that depends on how much money I have available to invest and what I do with it.
But rather than aim for a million by buying dozens of different shares and blindly hoping that one or two will perform brilliantly, I would buy just a few carefully-selected shares. Here’s why.
Batting average
To understand this approach, first let us use a sporting analogy. Legendary Aussie batsman Sir Don Bradman has the highest career test match batting average ever. He managed an incredible 99.94. The next best player, Adam Voges, managed 61.87. Four more players managed over 60. In other words, most of the strongest test match players in history were within spitting distance of one another’s performance – but Bradman was simply leagues ahead.
Was ‘The Don’ just a particularly gifted at test match cricket? No. The same pattern shows in his first-class cricket record too. There, Bradman’s batting average was 95.14. The next closest player – Vijay Merchant – averaged 71.64, but fairly hot on his heels was George Headley with a batting average of 69.86.
How can one player in over a century of test match and first-class cricket outperform other great players so dramatically?
Warren Buffett on fat pitches
One element of achieving a good batting average is playing to your strengths. That is also true for investing. As billionaire Warren Buffett explains it using a baseball analogy: “The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot.”
Could taking the Buffett approach help me aim for a million? I think so. As he suggests, by not putting money into lots of just okay or quite good investment ideas but waiting and investing in a few brilliant ones, I ought to be able to improve my returns – dramatically.
How I’d aim for a million
Like Buffett, I would also ignore all shares not inside my circle of competence. If I cannot understand a company, I take an unnecessary risk by investing in it, no matter how high the potential rewards may seem.
Buffett’s company Berkshire Hathaway owns stakes in Bank of America, Bank of New York Mellon, Citigroup, and US Bancorp, for example. Banking sits squarely within the Sage of Omaha’s circle of competence.
Similarly, I would stick to what I know and can assess. Mostly, I buy UK shares in selected business sectors.
I would also wait for what Buffett calls “fat pitches”. Those are opportunities so compelling that they seem likely to help me achieve strong investment returns and strongly raising my stock market batting average. Those are usually rare, so I would put my money into only a few companies.
The impact on my long-term investing returns could be dramatic. Imagine I invested £20,000 today into 20 shares with a compound annual growth rate of 5%. After 25 years, my portfolio would be worth over £78,000.
But what if I put the same money into just a handful of great shares with a compounded annual growth rate of 15%? After 28 years, I would have a seven figure portfolio. So by finding amazing shares selling at attractive valuations, I would aim for a million!
