Punchcard Investing

Warren Buffett and Charlie Munger popularized the notion of punchcard investing. They think that if investors did this, then they’d probably see much higher returns.

You’re given piece of paper with 20 spots and every time you make an investment you punch a hole in one of the spots. The kicker is that you only get one piece of paper for YOUR ENTIRE LIFE!

So, you can only make 20 investments in your life. Wouldn’t that change the way that you think about investing?

Utilizing this methodology forces you to act in a few ways:

1. You’ll probably make less investments than you normally would have. This would mean that you would probably have a higher bar for what makes the cut.
2. Since you’re making less investments, you naturally have to put more money into each investment. For example, if you make 1,000 investments in your life then you can put a small bit of money here and a small bit of money there. If you’re only making 20 investments, you’ll be forced to put way more money into each investment.

So, it follows that you’ll be putting more money(2) into higher quality investments(1). That sounds like a great recipe for better returns.

Though, this isn’t typical typical advice. Typical investment advice nowadays says that you want to diversify your portfolio in order to minimize risk. Index fund investing popularized by John Bogle is probably the best option for most people. However, if you are an active investor (trying to pick winners and losers) then I think the punchcard framework would serve you well.

Full quote below:

According to Munger, Buffett starts by telling MBA students, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it, so that you had 20 punches — representing all the investments that you got to make in a lifetime. And once you’d punch through the card, you couldn’t make any more investments at all.”

Under those rules, Buffett explains, “you’d really have to think carefully about what you did, and you’d be forced to load up on what you really think about. So you’d do much better.”

Munger expressed that this concept had always seemed like a no-brainer to him and Buffett. “To me, it’s obvious that the winner has to bet very selectively,” he told the students. “It’s been obvious to me since very early in life. I don’t know why it’s not obvious to many other people.”
- Warren Buffett (link)

Happy investing!