I'm sure most of us share the aspiration of having a $1 million ASX share portfolio. The whole reason why we invest in ASX shares is to harness the power of compound interest – it's a lot easier to get to $1 million by investing in shares than a savings account, after all.
Here at the Fool, we like to encourage investors to build a portfolio of between 15 and 25 different shares. This is important to harness the benefits of diversification. But the reality is that if you make it to a $1 million portfolio, it will probably be only thanks to a handful of shares.
That's why picking the best companies you can is so important. Different companies can serve different roles in a portfolio.
You might have one share for its defensive, recession-resistant qualities that can protect your capital. You might have another one for high dividend income. A third choice might be a moonshot growth stock that you hope can turn out to be a 100-bagger.
So what kind of qualities should an investor look for in their own investments?
Well, to answer that, let's turn to one of the greatest investors of all time, Warren Buffett.
Some Buffett wisdom for $1 million of ASX shares
Buffett is a master stock picker. He has had more than 90 years on this planet to hone his craft, and he has certainly done so, turning Berkshire Hathaway Inc into a US$644 billion company over the course of his career.
The lion's share of Berkshire's (and thus Buffett's) returns have only come from a handful of shares though. Buffett said as much in his most recent letter to the shareholders of Berkshire:
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.
So what does Buffett look for in a winner? Well, luckily, some of his other letters from years gone by paint a pretty detailed picture. Here's some of what he said in 1993:
Both Coke and Gillette have actually increased their worldwide shares of market in recent years.
The might of their brand names, the attributes of their products, and the strength of their distribution systems give them an enormous competitive advantage, setting up a protective moat around their economic castles.
The average company, in contrast, does battle daily without any such means of protection
He then expanded on this in his letter this following year:
Our investments continue to be few in number and simple in concept: The truly big investment idea can usually be explained in a short paragraph.
We like a business with enduring competitive advantages that is run by able and owner-oriented people. When these attributes exist, and when we can make purchases at sensible prices, it is hard to go wrong.
So there you have it. Of course, finding these Buffett-approved shares is easier said than done. And you also make sure you pay the right price for them.
For example, one of my favourite ASX shares, one that I expect will help me get to $1 million one day, is Washington H. Soul Pattinson And Co Ltd (ASX: SOL). But I am hoping for a cheaper share price to add to my position than what the market is currently asking.
However, there are others that I think look like better value. Those include Adairs Ltd (ASX: ADH), Harvey Norman Holdings Limited (ASX: HVN) and JB Hi-Fi Ltd (ASX: JBH). I hope Buffett would approve.
