I’m delighted to report that five months after I wrote that M1 Macs had problems starting up from external disks, Apple has finally fixed Big Sur 11.4 so that they now work fully.
If you have an M1 Mac, you should now be able to connect supported storage, such as an SSD, install on it any version of Big Sur from 11.2 onwards, select that in the Startup Disk pane, and boot your Mac from that external disk.
This is very good news. I’d like to buy a new Mac Mini to replace our aging home server and my plan was to buy one with the base storage capacity and use an external disk as the boot drive. But the wonky-ness of booting from an external drive gave me pause.
I still don’t know when I’ll end up ordering the Mac Mini, but at least I don’t have to worry about whether I can boot from an external drive with it or not.