Turning a £20k investment into a million is a lofty goal. And whatever stocks and shares I choose to invest in, there’s no guarantee I’d achieve it.
But I’m inspired by the results of investors before me who have managed to run up their portfolios by thousands of percent to turn modest sums measured in thousands into millions — and sometimes billions — in their lifetimes. If they can do it, I reckon there’s potential for me and other people to do it also.
Jumping the first and most important hurdle
However, for me, the biggest hurdle to overcome is to avoid making big losses from shares — or drawdowns in stock trading jargon. It isn’t for nothing that world-famous investor Warren Buffett’s first rule of money management is: “Never lose money.” And his second rule is: “Never forget rule number one.”
The big problem with being in a losing investment that never recovers is that it is so difficult to dig back out of the hole. And the mathematics of the situation work against us. For example, if I lose 80% on one stock, it will take a 400% gain on the next just to break even. That’s if I reinvest only the remaining money from the initial loss.
Investors such as Buffett, Lord Lee and Mark Minervini deal with the problem by cutting there losing investments before they become too deep in the red. And so do I. We all make mistakes and, to me, there isn’t a better way than act with relative speed and decisiveness in such situations.
Buffett ditched his losing position in supermarket chain Tesco a few years ago. And he dumped his underwater airline stocks in 2020. Lord Lee is on record as saying he stops losing positions at 20%. And Minervini uses tighter stops than Lee’s.
It took me a long time to get my head around the importance of watching the downside in my portfolio. After all, I’m a long-term-focused investor using a business perspective and thorough analysis, based on valuation, opportunities, threats and fundamentals. But my overall portfolio has performed much better since I decided to accept that the market is often right and I’m often wrong with my opinions.
Buses and stock opportunities keep on coming
It really doesn’t matter much if I toss out a once-cherished and well-researched stock. That’s because one of the wonderful things about the stock market is new opportunities keep on coming. It’s a bit like waiting for buses. If I’m patient, one usually turns up.
And there have been some decent winning stocks in the past few years, driven by prosperous and growing underlying businesses. For example, clothing and sports retailer JD Sports Fashion has risen by just over 183% over the past three years. And, over the same period, information technology, consulting and software solutions provider Kainos is up by around 280%.
My plan for investing £20k in stocks and shares today to aim for a million involves searching for more growth opportunities, such as those two, and compounding the potential gains. However, all shares carry risks and there’s no certainty that I’ll achieve such gains even if I choose shares carefully.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Kainos and Tesco. 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.
This post was originally published on Motley Fool
