Image source: Games Workshop plc
I love the idea of becoming a stock market millionaire. But my approach to a millionaire is about keeping things simple rather than complicated.
So I’m not trying to hunt down a small company that few people have heard of in hopes that it will be the next big thing.
Instead, I build a portfolio based on well-known blue-chip stocks – and not many of them!
Getting serious about investing
Before digging into the details of such a method, it is important to mention that trying to make a millionaire requires commitment, both in terms of time and money. This is not some program where I hope to miraculously turn a few quid into a seven figure sum.
Instead, I invest in a certain way over the long term, continuing to put in more money and letting the money I’ve already invested work.
The amount depends on personal financial circumstances, but here I foresee putting £1k per month (£12k each year) into my Stocks and Other Shares ISA.
Hitting a million
Doing that and compounding my ISA at 10% a year means I could really aim for a million after 24 years. As a long-term investor, I am comfortable with that.
But what if I have a compound annual growth rate of 20%, not 10%?
Then, making the same monthly contribution of £1,000, I should just reach my target 16 years.
Zoom in on quality stocks at great prices
Both 10% and 20% are difficult goals to achieve over time, if you take the bad and the slippery years.
Still, I think they are possible. How can I aim for 20% and not 10%?
I intend to invest in other similar stocks, just a small selection of them. Focusing on a few good allocations means diversifying my portfolio a bit (while still diversifying), meaning that a strong performance in some stocks will have a larger overall impact on my return.
Applying the theory now
That sounds easy enough.
The devil is in the details, however, trying to spot players of such high caliber.
As an example, let me discuss one share that has achieved its target in the last five years. At that time, Games Workshop (LSE: GAW) is up 146% in value. In addition, it is a regular dividend payer.
How did I know five years ago that the company was so powerful? At that stage, it already has a proven business model and a strong track record: even well-established companies can produce strong performance. It had a large target market of customers who were willing to spend large sums of money on sports equipment.
Most importantly, Games Workshop had a competitive advantage. Its fictional universes and characters have helped build customer loyalty, giving it pricing power.
The company faces risks such as a weak economy, which can make gamers reluctant to continue buying new characters. That can hurt profits.
At the current share price, the valuation is too rich for me and I have no plans to buy the share now. But it does give lessons about the kind of signals I’m looking for when picking stocks as I aim to make a million.
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