Every investor wants to build a £1m portfolio. Unfortunately, very few make it to this benchmark. However, I am going to try and improve my odds of hitting this target by following the investment strategy developed by Warren Buffett over the past seven decades.
During his lengthy career, Buffett, or the ‘Oracle of Omaha’ as he is also known, has followed a relatively straightforward investment strategy. When he buys assets for his portfolio, he is looking for companies that meet a number of set criteria.
Warren Buffett’s criteria
First of all, he must understand how the business makes money. It must also be clear how the company is planning to grow its profits going forward. On top of these factors, the Oracle will only invest alongside a management team he trusts. They must have a long track record of creating and maintaining value for investors.
The billionaire will also only invest in companies that have strong balance sheets and robust competitive advantages. These can take many different forms. Generally, the investor wants to see a corporation with economies of scale or a significant brand, which will help it stand out from the competition.
Finally, whenever Buffett buys an investment, he wants to pay below his estimate of intrinsic value for the business. Companies that meet all of these criteria are few and far between. But they do exist.
A couple of the businesses that are currently on my list of stocks to buy that may meet all of Buffett’s criteria are the war games miniature producer Games Workshop and used-car retailer Lookers. Both of these companies have substantial competitive advantages, successful management and clean balance sheets.
Unfortunately, there is no guarantee these investments will produce a consistent positive return for investors. Picking stocks is a challenging process. Even Buffett gets it wrong occasionally. If I pick the wrong companies for my portfolio, it might take me a lot longer than initially expected to hit my £1m target.
Developing the strategy
Still, I believe that if I focus on these high-quality companies and invest in a basket of stocks on a regular basis, I can increase my chances of being able to build a seven-figure portfolio.
According to my numbers, if I can save a lump sum of £1,000 a month and achieve an average annual return on my money of 12%, I could hit my target within 20 years.
These numbers show how it could be possible to hit this target with a strict savings and investment plan. It will not happen overnight. The figures suggest it will take at least two decades to hit my savings target. That is assuming I can achieve an average annual return of 12%, which is far from guaranteed.
Nevertheless, this is the strategy I am planning to follow over the next couple of decades with the goal of copying at least some of Buffett’s success.