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I believe these Warren Buffett tips could help me build a million pound ISA

Edward Sheldon, CFA
·4-min read
Sign pointing towards route to becoming a millionaire.
Sign pointing towards route to becoming a millionaire.

Warren Buffett is the greatest investor of all time. Over the years, he’s built up a net worth of around $80bn by investing in stocks.

I believe Buffett’s investment tips could help me build a fortune from stocks too. I think the three tips below could, over time, help me build an ISA worth a million pounds or more.

Buffett tip #1

Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, 10, and 20 years from now.”

This is a brilliant Buffett quote. What he’s saying is that investing doesn’t need to be complicated. If I simply invest in companies guaranteed to be much bigger in the future than they are today, I’ll probably do pretty well from my investments over time.

I’ve been following this tip from Buffett in recent years and it’s worked well for me, so far. I’ve built up decent-sized positions in tech powerhouses such as Apple, Alphabet, and Microsoft, because I’m convinced in 10 years’ time, these companies will be much bigger than they are today.

close-up photo of investor Warren Buffett
close-up photo of investor Warren Buffett

Tip # 2

The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed and not the achievement of consistent gains in earnings per share.”

This quote from Buffett – which you don’t see every day – is an extremely powerful tip. It’s one of the secrets to his investment success. What he’s saying here is that when analysing a stock, it’s more important to focus on return on capital employed (profitability) than earnings per share growth. Companies with a high ROCE are very profitable and tend to grow much larger over time.

Buffett’s been talking about the importance of ROCE since the 1970s. Yet, for some reason, few investors have listened. One investor who has followed this Buffett tip is Fundsmith manager Terry Smith. And look at his returns over the last decade.

I’m focusing my own portfolio on companies that have a high ROCE. Unilever, Mastercard, and Softcat are some examples of high-ROCE stocks I own. I believe this investment strategy should help me build a million pound portfolio, over time.

Tip #3

I will tell you how to become rich. Be fearful when others are greedy. Be greedy when others are fearful.

Finally, I have to include this tip from Buffett. What he’s saying here is that the best time to buy stocks is when others are panicking.

This year, we’ve seen investors panic on a number of occasions. In February and March, investor fear levels were off the charts. When panic’s been high, I’ve taken the opportunity to invest in top businesses at great prices. And it’s worked wonders.

For example, in March, I bought shares in ASOS for 1,100p per share. They’re now at 4,800p. Also in March, I bought shares in PayPal for $90 per share. They’re now at $194.

If I can keep buying great Buffett-style businesses at bargain prices, it won’t take me long to build up a million. If I continue to invest £10k-£20k per year into my ISA and earn 10% per year from Buffett-style stocks, I should hit a million in just 15-20 years.

The post I believe these Warren Buffett tips could help me build a million pound ISA appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Apple, Microsoft, Alphabet, PayPal, ASOS, Unilever, Softcat and Mastercard and has a position in Fundsmith. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Apple, Mastercard, Microsoft, and PayPal Holdings. The Motley Fool UK has recommended ASOS, Softcat, and Unilever and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, and long January 2022 $75 calls on PayPal Holdings. 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.

Motley Fool UK 2020