Every month we’ll be sharing some of our process and thinking around our investing. Previously we’ve discussed investing in the Covid recovery with our investment in Rolls-Royce in the UK. Today we’ll discuss our longer term investments referencing some of the wisdom from the most successful investor to date, Warren Buffett.
What’s Warren Buffet’s punch card approach to investing?
When Warren lectures at business schools, he often says, “I could improve your ultimate financial welfare by giving you a punch card with only 20 slots in it so that you had 20 punches—representing all the investments that you have to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.” He continues to say “Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”
Why the punch card mentality is effective
Warren Buffett’s punch card is really talking about how to simplify your investments and life and maximise your results. He believes an investors’ financial performance can be improved by limiting investments they are allowed to make throughout their investment career. Therefore, investors are encouraged to be extremely thoughtful and patient when picking investments.
Studies show that only a handful of stocks have produced most of the market's returns in the past 10 to 20 years. However, the average holding period for stocks has dropped from 10 years to less than a year. It shows that long term investing is the best way to grow your wealth, but this is more often than not, different to what we see around us.
How to implement a punch card mentality
Buy businesses rather than stocks
Buffet recommends thinking about investing as buying businesses, rather than stocks. Look for great businesses that have a competitive advantage and manage its capital well. If we own businesses with these qualities and ones that are well run, have great cash flow and good directional winds, it is always better to keep them for the long run.
Businesses with an economic moat
An economic moat is a distinct advantage a company has over its competitors which allows it to protect its market share and profitability. Begin to look at the companies financial statements to find out more. Ask yourself the following questions. Does the company have good operating margins? Are the company’s earnings per share constantly rising over a longer period of time? Is the company able to raise their prices over time?
Have a long runway and buy at opportune moments
With the average S&P500 returns being at 9.2% in the last decade, as a general rule, it’s best to start investing early and give yourself the longest runway. We also know it is hard to time the market, but you can wait for the right pitch. Buffet famously says “The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch”. You should look to buy when the perfect opportunity comes your way and when a great business is undervalued or at fair value.
Why we like this approach
We like the importance of being selective and focused. Under this rule, investors should be careful of what they invest in and will be forced to allocate a lot on a well thought out thesis. This reminds us of this little diagram above taken from the book Essentialism by Greg McKeown. In both images the same amount of effort is exerted. In the image on the left, the energy is divided into many different activities. The result is that we have the unfulfilling experience of making a millimeter of progress in a million directions. In the image on the right, the energy is given to fewer activities. The result is that by investing in fewer things we have the satisfying experience of making significant progress in the things that matter most.
Our punch card stocks
Granted this investment style is at some odds with some of our short term trades and investments. We encourage investors to find their own style, as did Buffet in his early days. We take a generalist approach, but we still think of a portion of our investments as longterm or life time holdings. Our examples below:
Magna International (NYSE:MGA)
Well-run company with almost 20 years of top-line revenue growth, and earnings growing at around 9% per year.
Economic moat - has been in the business for decades and has slowly moved its strategic efforts to EVs and autonomous cars
Good directional winds, with potentially supplying Apple and other EV start ups.
Ambition in the market to become a leading contract car manufacturer
Food & Life Companies (TYO: 3563)
Well-run company, with around 8% revenue growth per year, earnings per share growth, revenue growth and a healthy gross profit margin.
Competitive advantage of food quality and price
Consumers are ecstatic about the brand (waiting times of up to 2 hrs)
Ambition in the market to become a global food brand of several brands
Final thoughts
Be selective with your time and finances, focus on a few essential tasks or investments and ignore all other distractions. Although not conventional wisdom, Warren Buffet’s punch card mentality is not just useful for financial investment, it is a sound approach for just about anything else.
Disclosure:
We went long Magna International in February 2021 and long Food & Life companies in April 2021.
Disclaimer:
This is not investment advice. Our content to be used for informational purposes only. It is important you do your own analysis before making any investment based on your own personal circumstances.
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