The legendary investor Warren Buffett is famous for his annual letters to the shareholders of his company Berkshire Hathaway. These letters are typically expansive, and packed with investing tips and wisdom, but written in an accessible and often humourous and witty manner.
The latest Berkshire letter is hot off the press, having only been released a few weeks ago.
One of the most pertinent things Buffett wrote this year was to do with finding winners for one's share portfolio.
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Some Warren Buffett wisdom to get to $1 million…
Here's what the great man himself had to say:
In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so. In some cases, also, bad moves by me have been rescued by very large doses of luck…
Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years – and a sometimes-forgotten advantage that favors long-term investors such as Berkshire…
The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.
So "it takes just a few winners to work wonders". That's the philosophy I like to take into my own investing practice. As such, I'm always on the hunt for the ASX's best shares – ones that could drive my own share portfolio to $1 million one day.
Of course, this is easier said than done. And if Buffett himself isn't immune from making mistakes, then we should all prepare for more than a few setbacks along the way.
You'll normally find that the companies that dominate their respective industries and markets have some kind of secret sauce that keeps them at the top of the pole. Buffett likes to call this competitive advantage a company's 'moat' – named for the protection it provides against competitors.
It could be a reputable or famous brand (think Coca-Cola, Apple or even Commonwealth Bank of Australia (ASX: CBA)), a cost advantage (perhaps Woolworths Group Ltd (ASX: WOW), or having an asset or product that customers have no choice but to use (a Transurban Group (ASX: TCL) toll road).
Buy the best companies – at the right price
But finding these quality companies is just the start. To truly find a winner, you need to buy it at the right price. Let's take Woolworths as an example.
You can't deny this company's quality as the leading supermarket operator in Australia.
If an investor bought Woolworths shares back in May of 2014, they would have paid around $31 a share. That would lead them to a rather uninspiring total return of just over 20% by this point of 2023 (albeit boosted by the dividends Woolworths has paid along the way).
But what if that investor instead waited until July 2016 to buy in? That's when Woolworths was in the midst of its Masters debacle, and the shares got down to around $17.50. If our investor had bought at this far more attractive share price, they would instead be sitting on a capital gain of well over 100% today:
WOW indeed.
So Buffett teaches us that getting to $1 million requires just a handful of quality shares, but bought at the right price.
I'm banking on shares that I think fit this mould to get my own wealth to over $1 million. Those include Washington H. Soul Pattinson and Co Ltd (ASX: SOL), the VanEck Morningstar Wide Moat ETF (ASX: MOAT), Adairs Ltd (ASX: ADH) and Wesfarmers Ltd (ASX: WES).
Only time will tell if any of these prove to be the flowers my wealth garden needs (and hopefully not weeds).
