A lot of people like the idea of becoming a stock market millionaire. Some try to achieve it without thinking hard about which investing strategy is best for them, or how they might turn the dream into a reality. If I wanted to aim for a million, I would learn from people who have already done it (in some cases, many times over).
An example is billionaire investor Warren Buffett. Buffett released his latest newsletter at the weekend and it contains a key insight I think could help make me a stock market millionaire!
Beyond 80/20
Many people are familiar with what is known as the 80/20 rule.
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Basically, a small number of things drive a lot of outcomes. For example, in any given cricket team there may be just a few players who are responsible for most wickets.
The same applies, in broad terms, to stock market investment. Buying decent shares can generate decent returns (although that is not guaranteed). But if I want the sort of outstanding returns that can help me aim for a million, simply buying decent shares might not give me the performance I need to succeed.
Instead, I want to find the sorts of shares that can really move the needle. These can be very few and far between.
Buffett on outperformance
How many such shares ought I to buy, while keeping a diversified portfolio to manage my risk?
Here is what Buffett had to say on the topic in this year’s letter to shareholder of his company Berkshire Hathaway. He started with a surprising sounding mea culpa: “In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so”.
But if Buffett has made so many investments even he describes as “so-so”, how has he turned Berkshire into a company worth over $600bn?
Buffett puts his success down to two things. One is taking a long-term approach to investing. The other he describes as “the product of about a dozen truly good decisions – that would be about one every five years”.
In other words, Buffett has made billions and billions of dollars by buying into just a small number of companies.
How I’d aim for a million
I would aim to do the same.
Like Buffett, I can focus on finding truly outstanding businesses selling at attractive prices. I hope to achieve higher investment returns doing that than spreading my money over dozens of different firms and praying that one of them turns out to be the next Amazon or Spirax-Sarco.
But will that help me hit my target as I aim for a million?
That depends not just on my rate of return but also on how much I invest. As a long-term investor, I am happy to think in years or even decades. But if I genuinely seek to aim for a million, the more money I can invest then the faster I might achieve my goal.
Even if my goal is much more modest, I think building a portfolio of just a few amazing companies could help me do better than stuffing my ISA with dozens and dozen of shares in an attempt to cover the waterfront!
