Becoming a stock market millionaire is not easy. Sure, there are some shares with amazing stories like Amazon or Tesla. But a lot of shares also go nowhere fast, or even destroy value, over time. To aim for a million from a standing start takes careful selection of shares.
It also takes money, of course. But that can be broken down into a manageable regular contribution.
What is “manageable” for any specific person will depend on their own financial circumstances. Here, I outline how I would aim for a million by investing £150 a week into carefully selected blue-chip UK shares.
Saving regularly to invest
£150 might not sound like the foundation of a seven-figure fortune (although the first stock purchase by billionaire investor Warren Buffett was three preferred shares in a company then known as Cities Service, for $38 apiece).
But patience and time can reward the long-term investor. £150 week after week adds up. In a year, it would be £7,800. Save like that for a decade and there would be close to £80,000 available to invest.
But that is far from a million pounds. Still, I would take the first step of setting up a share-dealing account or Stocks and Shares ISA and putting £150 into it each week. Clearly however, some magic sauce is needed.
Magic sauce – and more magic sauce
In fact, I would use two investing techniques to add some of that magic sauce to my ISA, that I think could help me realistically aim for a million.
The first is simple. Reinvesting my returns, just like Buffett does. Leaving capital gains and dividends inside my ISA to fund more share purchases is known as compounding.
If I invested £150 a week and compounded my ISA value at 10% a year, after a decade I would have an ISA worth around £130,000.
Focusing on great companies
Good — but still far from a million! So what is the second magic sauce alongside compounding?
Basically, I would aim to invest in just five to 10 superb companies rather than a wider selection of mediocre companies.
The maths here are straightforward. If I bought shares in 20 companies that had a compound annual return of 10% (that is already strong, in my view), I would have earned a million after 28 years.
Investing in just the best of those, achieving a 20% compound annual return, it would take just 18 years.
Learning from Warren Buffett
But finding truly great businesses that compound at 20% annually over decades is rare. Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) though has seen its per-share market value compound annually at 19.8% since 1965.
How? Berkshire compounds its earnings. It buys into businesses with large user bases that look set to endure, from railways to insurers.
Its portfolio of businesses involves capital-intensive and capital-light firms but what they all have in common is significant cash generation potential.
Buffett looks for competitive advantages when Berkshire invests in a firm. He also focuses on valuation.
I would follow the same principles as I aim for a million. My approach would be to use the principles Buffett has employed at Berkshire to help me identify a few brilliant businesses with attractive share prices.
The post Here’s how I’d aim for a million, by investing £150 a week appeared first on The Motley Fool UK.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and Tesla. 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.
