London-listed FTSE shares have the potential to be an engine for long-term compounded returns.
A study by analysts at Schroders found that 59 UK public companies became 30-baggers in recent years. In other words, those stocks increased in value 30-fold.
That works out at 5.4% of all companies in the UK stock market compared to 4.2% achieving the feat in America. However, such outperformers may be hard to spot initially. Most came from mundane sectors.
According to investing legend Warren Buffett, the market is packed with stocks backed by poor or mediocre businesses. But there’s a handful of good ones.
Careful research is necessary before investing in stocks for the long term. But the potential of FTSE stocks may be worth the effort.
Wonderful returns
For me, compounding means reinvesting shareholder dividends along the way. Or recycling capital into a new stock position after selling shares. But in some cases, investee companies will likely plough earnings back into the business to drive growth. And that will potentially be a case of compounding happening in my portfolio without action from me.
Some investors have achieved impressive results from compounding over a period of years. After all, the process builds overall gains exponentially.
In other words, the gain in pound coins each year tends to get bigger and bigger as time goes by. That’s why billionaire investor Charlie Munger once said the most important thing is to avoid interrupting the process.
The company he helped build with Warren Buffett – Berkshire Hathaway — is a great example.
By 2022, the firm’s compounded annual gain was running at 19.8%. And under Warren Buffett, the record stretches back to 1965.
That’s a long time to keep up the compounding process by investing in stocks and businesses. And according to Buffett, it led to a mind-boggling overall gain for those decades of 3,787,464%!
Compounding takes effort
Of course, most investors won’t see an outcome like that in their lifetimes. Compounding at almost 20% annually for that long takes dedication, skill, a stout heart and endurance.
I’m too lazy to keep up the effort into my 90’s like Buffett has done. But he pointed out that America’s S&P 500 index has produced a compound annual return of 9.9% over the same multi-decade period.
To me then, it’s a no-brainer to dedicate part of a £7,000 investment to low-cost, passive index tracker funds. Over the long-term, compounding will likely happen while I’m busy ‘doing life’. Although it’s always worth remembering that past performance is no guarantee of future returns.
Nevertheless, I’d set up regular investments into a range of trackers such as some following the UK’s FTSE 250 mid-cap index. But the stock-picker in me would also aim to seek out those few exceptional businesses selling at fair valuations.
I’d aim to put some of my £7,000 investment into carefully chosen small- and mid-cap FTSE shares to try to find the next long-term star performers. And I’d begin my research right now.
