The Motley Fool

£10k to invest? I think following Buffett could help you achieve a 50% return

Warren Buffett, the US investing legend, says it’s much easier to achieve high returns on a smaller amount of money. This is how I’d do it with £10k.

Why did Buffett achieved better returns in the past?

It’s simply because he didn’t have to manage such enormous sums of money. You see, when you have to look after hundreds of billions dollars, there’re certain diseconomies of scale. That is, it’s quite expensive to manage large companies and it requires plenty of attention. 

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

What is more, large hedge funds usually devote large sums of money to buying big companies. It’s not just because they become complacent and risk-averse by managing other people’s money. It’s because when you buy a small cap, you don’t want to invest too much in it. So, if you manage so much money, you’d have to find plenty of small caps to invest in. Doing so requires many labour resources. But the result is not easily felt. That’s why many large funds invest in a small handful of large reliable companies.

I personally consider this to be a low-risk strategy. However, this reduces the potential to earn extra money. Large caps are actively researched by many analysts and investors. So, they often trade at high accounting multipliers.

This is how I’d get rich 

When deciding to invest my £10k, I’d follow Buffett’s decision-making process. First, I’d identify an industry. It must be an industry I like and understand well. Then, I’d look for particular companies in this sector. This wouldn’t have to be very thorough research on each and every company. At the same time, don’t forget that scanning plenty of companies raises your chances of finding a handful of great investment opportunities.

I was surprised to learn that Warren Buffett likes reading Moody’s manual to get a sense of every single listed company. I also like checking companies’ credit ratings, especially the “ratings rationales“. Moody’s is the first agency I check. The process isn’t too long but it allows me to exclude some of the ‘bad’ options straight away.

I think the best idea is to invest in UK companies. British companies are subject to strict accounting and corporate governance regulations. Firms in many other countries might not have to follow such standards. What’s more, shares denominated in foreign currencies might depreciate substantially against the pound. So, investors from the UK will face some additional risks.

Buffett just like his teacher, Ben Graham, often looks for stocks trading far below their intrinsic value. In other words, he looks for companies with a history of rising profits. At the same time, these stocks should trade at a price-to-earnings (P/E) ratio of less than 20 and a price-to-book (P/B) ratio of less than 3.  

Last but not least, to achieve a 50% return per year on your £10k I’d suggest taking advantage of stock market crashes. The last thing you should do is to buy when everyone else is buying. Instead, you should buy when everyone panic sells. Just like Buffett, who says “Be fearful when others are greedy and greedy when others are fearful”.

If it's best-in-class shares you're looking for, we can surely help you.

The high-calibre small-cap stock flying under the City’s radar

Adventurous investors like you won’t want to miss out on what could be a truly astonishing opportunity…

You see, over the past three years, this AIM-listed company has been quietly powering ahead… rewarding its shareholders with generous share price growth thanks to a carefully orchestrated ‘buy and build’ strategy.

And with a first-class management team at the helm, a proven, well-executed business model, plus market-leading positions in high-margin, niche products… our analysts believe there’s still plenty more potential growth in the pipeline.

Here’s your chance to discover exactly what has got our Motley Fool UK investment team all hot-under-the-collar about this tiny £350+ million enterprise… inside a specially prepared free investment report.

But here’s the really exciting part… right now, we believe many UK investors have quite simply never heard of this company before!

Click here to claim your copy of this special investment report — and we’ll tell you the name of this Top Small-Cap Stock… free of charge!

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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.