What sort of growth is realistic for a Stocks and Shares ISA?
The answer depends on the investment strategy someone takes and how successful it turns out to be over the long run.
Of course, we would all like to achieve the sort of investment returns achieved by Warren Buffett. Few of us probably will. But what if, learning from his approach, we managed to do even half as well?
Applying lessons from a proven stock market master
During Buffett’s long tenure at the helm of Berkshire Hathaway, the company compounded its per-share market value by 19.9% annually, on average.
That was over a period of almost 60 years.
Even doing half as well (9.95%) is harder than it sounds, though I think it is a realistic goal for an investor who seriously considers how best to use their Stocks and Shares ISA.
Plus – and Buffett himself has said something along these lines – such an investor would have a massive advantage over Buffett for much of that decades-long period: a relatively small amount of money.
Why being a small investor can help achieve big returns
That may sound confusing — but it makes sense.
Putting just a small amount of money to work makes it far easier to achieve outsized returns than when investing billions.
That is borne out by a quick look at Berkshire’s strongest annual per-share market value gain by decade. In the 1960s it was 78%. In the 1970s: 129%. The 1980s? 94%. By the 1990s, 57%, falling to 29% in the 2000s and 33% in the 2010s.
For the part of the 2020s overseen by Buffett, it was 30%.
Still a brilliant performance, but the long-term trend backs up Buffett’s view. As the amount of money being invested grew, it got harder to achieve the stellar results of the earlier years.
Looking for strong long-term performers
One factor in the long-term performance of a Stocks and Shares ISA is the fees and commissions levied, so it is important to shop around when comparing options.
What else matters? Clearly a key factor will be the shares held in the ISA. I have been buying one lately that I think mirrors much of Buffett’s approach.
He likes well-established consumer brands with strong franchises. He likes companies with a proven ability to generate lots of excess cash. He likes big businesses with economies of scale.
The share I have been buying has them all. It is soup maker Campbell’s (NASDAQ: CPB). Incredibly for such a proven operator, the current dividend yield is 7.8%.
That is already edging towards the 9.95% figure I mentioned above. But while the yield is high, the share price has been a disaster, falling nearly three fifths in five years.
Such a fall reflects risks Buffett knows all too well from his investment in Kraft Heinz.
Processed food brands are losing favour with consumers. Indeed, Campbell’s revenues have been declining. Meanwhile, the Middle Eastern conflict threatens to push up inflation, squeezing food producers’ profit margins.
But Campbell’s has a wide portfolio of brands with growth potential. It is highly cash generative. I expect it to adapt its offering to match shifting consumer tastes.
From my long-term perspective, its current share price looks like it could be a screaming bargain.
Should you invest £5,000 in Campbell's right now?
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Christopher Ruane owns shares in Campbell’s.
