The markets have understandably always attracted people who want to build wealth, and the idea of becoming a stock market millionaire has captured the imagination of many.
For those on an average salary, the goal of making a million from stocks may seem like a big ambition. But many have achieved just that from stocks and shares. So the magic million may not be as grand a target as we might think.
Good business selection is critical
Previously, some investors have achieved impressive returns by choosing undervalued stocks and holding on to them for the long term.
But not just any old cheap stock will do. Good business selection is critical to the process. And that means investors must be willing to roll up their sleeves and do plenty of research and due diligence before plunging into any stock.
But finding those hidden gems can be difficult. There’s an old saying that being a private investor is a hard way to make an easy living! And that kind of wisdom arises because it’s easy to make mistakes along the way.
Sometimes, those great potential investments we find can come to little. And worse, sometimes stocks go down instead of up, then stay there causing us to lose money rather than make it.
But billionaire investor Warren Buffett cautions against another problem. He said there’s more to finding winning investments than examining the company’s financial numbers and valuation statistics. If that was all there was to the game, anyone willing to gain some skill crunching the numbers would become rich.
But the hard truth is that many private investors underperform the general stock market. Or they match its returns at best. As do many professional fund managers.
Non-quantitative factors to find
However, Buffett also looks for things that don’t show up in the numbers. For example, he aims to peer into the future and imagine what a business may grow to become. And he looks for a company with an able, honest and visionary management team. He also aims to find businesses with entrepreneurial cultures.
So having a few great companies in a portfolio can lead to impressive returns over years. But that’s not always the case. Nevertheless, if a business can grow and compound its earnings over time, the total returns for shareholders can be significant.
One of the big hopes in my own portfolio right now is the miniature figures and games maker Games Workshop in the FTSE 250 index.
But that’s not the only way to approach investing. Fidelity’s one-time outperforming fund manager Peter Lynch achieved great returns by trading stalwart stocks over shorter time periods.
And to do that, he looked for strong and stable businesses with valuations that appeared depressed in the short term. Then he’d buy and hold some of their shares until the valuation ‘corrected’ higher, usually involving a rise in the share price. Although not all his investments were successful.
Meanwhile, many shares have cheap-looking valuations right now. And I reckon it’s a good time to embark on a programme of stock market investment to aim for a million, whatever the strategy followed.
