Image source: The Motley Fool
Taking a long-term approach and investing regularly in high-quality shares, I think it is possible to become a stock market millionaire. But rather than trying to scoop up shares in dozens of different firms as I aim for a million, I would put my money into just a small number of shares. Here’s why.
Aiming very high
Were I a sports team manager, what would make the biggest difference to my team’s performance? Signing one world class player with proven outstanding capabilities, or a bunch of decent players?
I think the answer is obvious – and it is the same in the stock market.
Rather than going for the hundred best-performing shares of the past decade, as an investor I would have done better putting all my money into the best of the bunch. But there is a problem doing that in practice. Ten years ago, nobody knew what share would perform best.
Risk and reward
Even a great company can run into unexpected difficulties, hurting its share price performance and sometimes driving it to extinction. So I diversify across a range of firms.
But the broad principle still applies: my investment returns can be dramatically better owning brilliantly performing shares than merely decent ones. I think owning five high-quality shares in different industries can offer me the right combination of diversification and concentrating on my top investment ideas.
Choosing five shares to buy
But what five shares would I buy? The answer, perhaps surprisingly, is: I don’t know!
Investing is a long-term pursuit. If I seriously want to aim for a million, whether starting with a sizeable lump sum or drip-feeding money regularly, I expect to spend many years on the effort. I do not necessarily need to buy the shares upfront or as soon as I first learn about them. Warren Buffett read about IBM shares for five decades or so before finally making a move on the stock!
So first, I would do some research to find companies I think are truly outstanding in their commercial potential. For example, I think Intuitive Surgical meets that description. Demand for robotic surgery is set to keep growing and Intuitive has patented technology that gives it a strong competitive advantage.
Secondly, I would consider the price of any company I thought was great. If I want to aim for a million, I am more likely to succeed if I do not overpay for a share. I think Intuitive is a brilliant business, but its price-to-earnings ratio of over 70 is too high for my tastes.
Time and patience
If I am serious about focusing on some of the best possible investments I can make, I need to be willing to sit on my hands, perhaps for years. I would refrain from investing until I find really world class businesses that sell at a compelling price.
That takes time and patience, as well as needing money to invest. But hopefully, it could end up being far more rewarding for me than buying dozens of relatively mediocre shares!