With a combined age of 191 years, Warren Buffett and Charlie Munger probably know more about investing than anyone else alive.
As chief executive and vice chairman of Berkshire Hathaway, they’ve presided over a company that’s currently worth $735bn.
Between 1965 and 2022, the compound annual growth rate (CAGR) of the company’s stock was 19.8%. This means £10,000 invested 57 years ago would now be worth £296m.
Over the same period, the S&P 500 (with dividends reinvested) had a CAGR of 9.9%. Although ‘only’ half that achieved by the two nonagenarians, a £1,000 investment in 1965 in a fund that tracked this index would now be worth £2m.
This huge disparity illustrates how, over a long period, choosing the right stocks can make a massive difference to an individual’s wealth.
Breaking convention
When I looked at the 2023 Q1 accounts for Berkshire Hathaway, I was surprised to learn that 77% of the value of its equities was derived from just five stocks.
And two of them are in the same sector.
| Stock | Value of shareholding at 31 March 2023 ($bn) | Sector |
| Apple | 151.0 | Technology |
| Bank of America | 29.5 | Financial services |
| American Express Company | 25.0 | Financial services |
| The Coca-Cola Company | 24.8 | Consumer staples |
| Chevron Corporation | 21.6 | Energy |
| Combined | 251.9 |
Most investment gurus advise that a portfolio should be more diversified than this.
But Buffett suggests investing only in a handful of quality companies. Munger agrees, claiming there are advantages when “you make a few great investments and just sit back“.
Dream big
This got me thinking. Could I turn £10k into £150k within 15 years, by investing in only a few UK stocks?
If I were to do this, I’d have to at least match the CAGR achieved by Berkshire Hathaway.
To identify potential high-growth stocks, I looked at some recent top performers.
Games Workshop is the best in the FTSE 350. It’s grown 256% over five years — an annual growth rate of 28.1%.
The Alternative Investment Market is home to riskier shares that could produce higher gains (or losses) than those of more established companies. The best performing since 2018 is Cerillion, with a CAGR of 54.9%.
But, as companies mature, their rate of growth usually slows.
Therefore, although it’s suffered lately, my preferred choice would be Scottish Mortgage Investment Trust (SMIT). From 2017 to 2022, its share price increased by an equivalent of 23.6% each year.
It specialises in high growth stocks, which means it has the potential to deliver impressive long-term returns.
With a total of 98 separate holdings there’s considerable diversification, although most are in the tech sector. However, largely driven by the potential of artificial intelligence, these types of stocks appear to be back in fashion.
If SMIT repeats its 2017-2022 performance over the next 15 years, a £10k investment would grow to £240k.
In fact, I’d meet my £150k target two years’ early.
| Scottish Mortgage Investment Trust (Top 5 holdings) | % of total assets |
| ASML | 8.6 |
| Moderna | 7.3 |
| Tesla | 5.2 |
| MercadoLibre | 4.3 |
| Nvidia | 4.2 |
| Total | 29.6 |
Final thoughts
All this is hypothetical, of course. The past is not necessarily a good guide to the future. And another ‘dot com’ boom and bust could be round the corner.
I also have to acknowledge that I don’t have the experience and expertise (few do) of Messrs Buffett and Munger. I’m therefore more likely to pick the ‘wrong’ stock.
But if I had a spare £10k — unfortunately I don’t — I’d try and turn it into £150k by investing in SMIT.
