At this time of year, many people think about getting into the stock market, or perhaps reviewing their existing portfolio of shares.
It need not take a lot of money to start investing. However, whether investing with a few hundred pounds or billions, many of the world’s great investors over the ages (such as Warren Buffett and George Soros) have tended to follow certain principles.
Finding brilliant businesses really matters
Many people put money into the stock market because they think a company is worth more than its current share price suggests. There is a logic to that. But such an approach can miss one key element to long-term investing: putting money into brilliant, not merely good, businesses.
Buying into a brilliant business at a good price can be better over the long term than investing in a merely decent business at a great price. The latter is basically a one-off move based on a perceived mismatch between current share price and what that share ought really to be worth.
But the approach based on identifying brilliant companies builds on the insight that a truly great business ought hopefully to keep generating value over the long term
Being patient
It can be tempting, with money sitting idle in an ISA, to invest in the first decent idea that comes along. But brilliant investors are often willing to sit on money for years, or even decades, before putting it to work in the stock market. After buying shares, they sometimes hang onto them for decades.
As Buffett’s late partner Charlie Munger said: “The big money Is not In the buying and the selling but In the waiting”.
Building success on success
One of the reasons such a long-term approach to investing can build wealth is because it can help create more capital, giving an investor further opportunities for investment.
Buffett’s company Berkshire Hathaway does not pay dividends, despite being enormously profitable. It prefers to reinvest earnings in growing its business.
In fact, a small investor can also compound their capital gains and dividends. Doing so inside a Stocks and Shares ISA can be one way of having more money to invest inside the ISA while staying inside the contribution allowance.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
One dividend share I think investors ought to consider is FTSE 100 asset manager M&G. Its 39% share price increase over the past five years has helped shareholders build wealth, though it falls short of the FTSE 100’s 52% gain during that period.
But what M&G has done much better than the flagship UK stock market index is pay out passive income in the form of dividends. The FTSE 100 yields 3% at the moment – M&G yields well over double that, at 7.1%.
The firm also aims to grow its dividend per share each year, as it has managed to do over the past few years. Its business has significant cash generation potential that may help deliver that goal, thanks to a strong brand, large customer base and international reach.
But dividends are never guaranteed. One risk I see is investors pulling more money from M&G funds than they put in, hurting fee income.
M&G has struggled with that in recent years and it remains a risk. But hopefully a positive first-half performance in that respect bodes well for coming years!
