While turning £10k into a million may sound like an impossible task, over the long run a value investing strategy could increase your chances of achieving that goal. After all, Warren Buffett has bought high-quality businesses while they trade on low valuations over a long period. In doing so, he has become one of the richest people on earth.
Clearly, that level of success may not be possible for all investors. But, through following the strategy pursued by Buffett, it may be possible for you to outperform the wider stock market and generate a seven-figure portfolio.
Perhaps the most surprising fact about Warren Buffett is that he maintains a relatively large amount of cash at all times. This is somewhat illogical, as well as being inefficient, since cash has historically delivered much lower returns than other assets, such as shares.
However, Buffett holds cash for two main reasons. First, it provides peace of mind during difficult economic periods. Should you require cash during such times, perhaps for a car or housing repair for example, it can be difficult to liquidate assets that have fallen in value.
Second, Buffett also holds a significant amount of cash in order to capitalise on buying opportunities while investor sentiment is weak.
In fact, he has a history of becoming increasingly bullish as other investors become less optimistic about the prospects for the stock market. Through building up cash during bull runs for the stock market and investing it when the market experiences one of its downturns, he accesses lower starting prices on the companies he holds compared to many other investors.
Of course, the low prices Buffett pays for the stocks he holds is just one reason for his success. Another reason is that he is able to unearth high-quality businesses that can deliver sustainable growth over a long time period.
In order to achieve this, he focuses on a company’s economic moat. This essentially equates to ascertaining whether a business has a competitive advantage over its peers that will allow it to generate higher profit growth than the wider industry over the long run. This may be a lower cost base, a unique product or a high degree of customer loyalty, for example.
Although no business is ever immune from challenging operating conditions, companies with wide economic moats may be better placed to overcome them.
While many investors look to buy and sell their holdings every couple of years, Buffett holds on to his winners. In fact, some of his biggest holdings have been in his portfolio for decades, and the impact of compounding on their returns has allowed him to outperform many of his peers.
Although it can be somewhat unexciting to simply buy a stock and hold it for many years, doing so provides a business with the opportunity to deliver on its competitive advantage, as well as implement strategy changes to catalyse its earnings growth.
As such, focusing on the best businesses while they trade at low prices, and holding them for the long run, could be a sound strategy to beat the market. Over many years, it could help you to generate a £1m portfolio.
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.