The other evening I was watching some videos online showing various Warren Buffet speeches he’s given both on TV and at various events over the years. As you’d expect they are packed full of good financial advice (such as avoid debt, leverage and always try and keep your capital safe, stick to what you know etc etc).
In the following video Buffett states that you need to take the good investing opportunities that come your way. Big opportunities have to be seized he states. He states that everyone would be a lot better off if when you left school you were given a punch card with 20 punches on it. Every time you make a financial decision it uses up a punch. Check it out here from 1:20 onwards….
He states that only having 20 punches would force you to think a lot more about the investing decisions you make. He then goes on to state that you would make yourself very rich too by following this approach. This got me thinking about how my own portfolio and financial situation would differ if I had been limited to just 20 punches in my financial career.
Property
If you read this blog regularly you’ll know I am quite heavily invested in UK property with 1 residential and 3 rental properties between my wife and I. I believe that if I’d subscribed to the 20 punches rule I would still be long UK property.
Most people have very strong views on buy to let investing here in the UK and usually for good reason. Play the BTL game with lots of leverage and a short term view and you’re (in my humble opinion) dicing with financial death. However I’m a firm believer that the (relatively) reliable income it can produce and the potential for (long term) capital growth continue to make property an attractive asset class.
After buying my first rental property almost 10 years ago I came very close to buying another almost immediately. Being young and comfortable with risk my finger almost pulled the trigger on additional property almost immediately. The only thing that stopped my was my impending move to London. At the time yields were much higher (circa 11%) than present day and if I knew I had only 20 punches I would have probably gone ahead and bought probably another 2-3 properties that year. In short I think I would have leveraged up more and ended up making a lot more money.
No Punts
Despite generally being a cautious, income focussed investor and usually sticking to the dividend investing rules, the recklessness in me is sometimes tempted by a punt. Sometimes I buy into a long term growth story and forsake my precious income. For example I recently invested in a company involved with mobile banking and payments (Monitise in case you care).
This deviation from my core investment criteria is something that probably would not be possible if I were under the 20 punch rule. At heart I’m a prudent soul so the lure of a steady income and tangible long term growth would have kept me away from such speculative investments.
Crunch Dem Numbers
I love a good spreadsheet. Spreadsheet form the basis of almost all of my investments or financial decisions. However I haven’t always been like this.The more time I spend as an investor, the more research I put into my potential investments.
Gone are the days where I’ll blindly invest in a stock because a mate heard about it in the pub. Whether it is a consequence of my ever increasing age or simply a fact of learning through mistakes I’m not sure but virtually every investment I make these days is more heavily researched than all those before it.
If I was limited to 20 punches then I’m pretty sure my average research time on each investment would at least quadruple. There’s a valuable lesson here for my non-20-punch self. Slow down and research more!
Patience on Price
This is investing lark is pretty simple really. Buy good companies at cheap prices and you can’t really go wrong, especially if they pay a nice steadily increasing dividend. While I like to think I am relatively competent at identifying good companies (and avoiding too much risk to my capital) one of my weaknesses is not having the patience to wait for said good companies to be undervalued.
When I’ve sold myself the story I like to pull the trigger and won’t necessarily wait to see if I can buy the shares at a cheaper price in the future. Under 20 punches I’d be forced to sit on my hands (and cash) and wait for the right price to come along.
Reduced Diversification
Reducing the frequency of my trading would almost certainly have resulted in me increasing the lot size of my trades. Just as Warren says you’ve got to grab the opportunities that come your way, I would have been forced to stake more on the few investments I would have made.
The one obvious benefit from this would have been that I would have significantly reduced my transaction costs over the years. On the flip side I would not have held such a diversified portfolio – which may or may not have been a good thing!
It is clear from doing a bit of reading about Warren Buffet that he never really subscribed to diversification. All throughout his career when he’s invested in a company he has done so in a big scale, usually by trying to buy the whole business. If you’ve done your job with your research then it makes perfect sense to invest with conviction and concentration into the companies you like.
Over Trading Trading
In the video above Buffett mentions the temptation to dabble with our investments and warns how easy it is (particularly in bull markets) to over trade, take punts and general invest without the proper due diligence. I’ve been guilty of all three of these deadly sins at various time in the past. Knowing that with 20 punches I would have avoided all three is a good motivation to avoiding doing so again in the future.
I’ve been in and out of several defensive stocks over the years (Vodafone, BP, GSK, NG to name a few). If Wazza took a look at my trading account history he’s probably think I suffered from ADHD or some such other made up syndrome. ‘Trading the range’ used to seem like a great idea a few years ago but as I slowly start to get older and [possibly] wiser i’m slowly turning into more of a buy and hold guy. 20 punches would have ensured I was from the start.
More Success
Having thought about this I am absolutely convinced that my portfolios performance would have performed better had I been limited to 20 punches.
Looking at what I’ve written up above I’m a little embarrassed. All of ‘the things I would have done’ are common sense and something that any good investor worth his or her salt should be doing more of. All of them (except maybe the increased property exposure) are things I am beginning to integrate more and more into my investment decisions so it’s a little worrying to ask myself why I haven’t been doing this all along?!
Because you are an intelligent chap and are going through life learning from your mistakes 😉 I regard the money I lost in the dotcom bust as good value training now from a perspective that it taught me what not to do. Like you, I’ve slowed down my trading dramatically and my portfolio seems to look a lot better for it. The 20 punch card metaphor helped me too, and bull markets both frighten and bore me now, because there’s nothing to do and ISA allowances to think of something else to do with.
As a reader, I’d much rather read the narrative of someone who is self-aware enough to acknowledge and learn from mistakes too!
Great article – thanks.
I seem to remember reading that Buffett advocated a concentrated portfolio in the build phase and later, a more diverse portfolio to preserve wealth.
p.s. why no facebook/twitter share buttons – or did I miss them?
Thanks 🙂
Why no facebook/twitter buttons? Because I haven’t got round to putting them up yet. I’ve just put it back on my to do list 😉