3 principles from Warren Buffett that could help turn an investor into an ISA millionaire
A Stocks and Shares ISA is a great tool that millions use to build an investment portfolio. Striving to hit the million-pound mark is clearly going to take some time. Yet, legendary investor Warren Buffett has achieved some incredible returns over decades that show it can be possible with some patience and regular cash flow. Here are some principles investors could do well to imitate.
Getting the right timeframe
Buffett has been quoted as saying that his “favourite holding period is forever”. What he means by this is that he prefers to buy a stock and then hold it for the long term. This contrasts with short-term trading. Part of the reason behind this is the potential for gains to compound over time.
For example, consider Investec (LSE:INVP). Over the past year, the stock is down 9%. Some might grumble and consider selling it. Yet if we look at a broader time frame, we can see that the stock is up 239% over the past five years.
The business has done well as interest rates rose following the pandemic, boosting net interest income. Further, it has experienced growth in the asset management space, earning higher fees along the way. I don’t see interest rates in the UK going back to pre-pandemic levels in the next decade. If I’m right, this should help to support the bank for the years to come.
Of course, in the space of the coming months, the share price could fall further. One risk is that the company’s smaller scale and product breadth may hamper growth. It’s not as nimble as fintech firms nor as powerful as Wall Street titans. Yet overall, I think it’s a stock to consider to implement Buffett’s long-term strategy.
Quality at a fair price
A good thought from Buffett is that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. Buffett prefers durable businesses with strong brands, consistent cash flow, and capable management. This carries through even if they’re not the absolute cheapest.
The thinking here is that, over time, a well-run business should have larger share price gains than an average one. So, if an investor likes a stock but is unsure whether it’s cheap enough to buy, Buffett’s thinking could help. Using this idea it could help the ISA grow at a faster pace.
Know your lane
To grow an ISA to a set goal, an investor needs to stick to their area of competence. Buffett alluded to this when he said, “never invest in a business you cannot understand”. This means focusing on companies with clear business models, predictable earnings, and long-term competitive advantages.
By extending this to businesses where an investor has specific expertise, it can lead to great stock picks that could beat passive investing. This could translate to a higher growth rate for the ISA portfolio value.
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Pound coins for sale — 31 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
