I think UK shares can be great for investors. Whether it’s passive income or striving for a million pounds, the FTSE 100 and the FTSE 250 have some great opportunities.
It’s no secret that UK stocks have underperformed their US counterparts lately. But outperforming the rest of the stock market isn’t always essential for building wealth over time.
Warren Buffett
A great example is Warren Buffett’s decision to buy Coca-Cola (NYSE:KO) shares – an investment that was completed in 1994 for around $1.3bn. Today, it has a market value today of around $24bn.
Here’s the thing, though. As I see it, the reason the biggest investment has been so successful hasn’t been the company’s growth, its competitive advantage, or the price Buffett paid for it.
What matters most, in my view, is that Buffett bought the shares and held on to them for a long time. That’s what has allowed the returns of the investment to grow by so much.
The best evidence of this comes from comparing the performance of the stock with the S&P 500. Since 1994, the Coca-Cola shares price is up around 478%, but the index is up 922%.
In other words, Coca-Cola shares have underperformed the S&P 500 over the last 30 years. But anyone who – like Buffett – bought the stock in 1994 and held on has done just fine since then.
Durable businesses
Coca-Cola shares have been such a good investment because of the company’s durability. The firm has grown its product range, and used the size and scale of its distribution network to its advantage.
While the company is unique in several ways, there are a number of UK shares that look similarly durable to me. One of these is consumer products business Unilever (LSE:ULVR).
Back in 2017, Buffett attempted to buy Unilever outright for around £114bn – a 25% premium to today’s share price. But that doesn’t automatically make the stock undervalued.
Being part of a bigger organisation might help the company perform better than it can by itself. So investors should be cautious before concluding the stock is cheap on this basis.
Nonetheless, I think Buffett’s interest is a clear sign the business is a durable one. The strength of its brands combined with its marketing resources give it a powerful advantage over competitors.
Buying and holding
The key to Buffett’s success in building wealth is being prepared to hold stocks for a long time. With a £20,000 Stocks and Shares ISA contribution limit, there are a few UK stocks I think I could own for decades.
Unilever is a good example. I don’t know what the share price will do over the next few weeks or months, but I have a lot more conviction about what the long-term outlook for the stock.
That’s because a company’s share price tends to match the performance of the underlying business over time. So in aiming for a million, it’s a stock I’d be looking to buy.
The post How I’d invest £20,000 in UK shares to aim for a million appeared first on The Motley Fool UK.
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Stephen Wright has positions in Unilever Plc. The Motley Fool UK has recommended Unilever Plc. 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.
