Investors may occasionally find themselves fortunate enough to have a large chunk of cash in the bank, such as £10,000. This could stem from consistent savings or an inheritance windfall. It may seem tempting to go shopping for a bit of retail therapy. But for those willing to be patient and take on a bit of risk, this capital could be transformed into a seven-figure Stocks and Shares ISA. Here’s how.
Building wealth
Achieving a 100x return isn’t easy. Investing in a promising penny stock that turns out to be successful could end up producing such returns in a relatively short space of time. But such success is pretty rare, and investors will likely end up seeing their wealth disappear.
However, the level of risk an investor is required to take for such returns can be significantly reduced by simply extending the time horizon. Why? Because by investing for the long term, investors aren’t restricted to just small-cap and penny stocks to hit their goal of becoming millionaires.
If I want to hit this threshold within a decade, then my portfolio would need to generate an average annualised return of 47%. Needless to say, achieving more than double the performance of billionaire investor Warren Buffett seems unlikely. Neither does the 23.5% annual gain for doing this in 20 years.
But extending out to 35 years drops the return requirement to just 13.5%. That’s still ahead of the FTSE 100’s average of 8%. But through prudent stock picking, generating this market-beating return isn’t unrealistic.
Picking winning companies
Achieving those market-beating returns can be quite a challenging process. Not just academically when it comes to analysis and research but also emotionally. Building a custom portfolio of individual stocks can be quite a volatile experience compared to index investing. And standing firm behind a well-researched investment thesis can be tough when things are seemingly moving in the wrong direction.
But what actually makes for a winning investment in the stock market? There are a lot of critical characteristics and factors to consider when deciding which stocks to buy. But one way I like to quickly narrow down the list is to use the Return on Invested Capital (ROIC).
The metric measures how much money a company makes from each £1 it invests in itself. And while it isn’t flawless, it’s arguably one of the best ways to measure how much value a company is generating for shareholders.
An ROIC of 10% is fairly average. But I’m after above-average returns. So any firm capable of generating more than 20% is likely worth investigating further. This is especially true if they’re trading at a seemingly cheap valuation based on multiples like the price-to-earnings (P/E), or price-to-sales (P/S) ratios.
