Warren Buffett’s ’20 Punches’ or ’20 Slot Punch Card’ Investing Rule has become world famous. He has mentioned it several times in his talks to students and investors.
In Warren’s talk at Georgetown University, he discussed finding companies to invest in. He said that there are thousands of opportunities to invest, but you don’t need to understand them all.
He compared investing to baseball, that investing is an advantageous game and that you don’t need to take a swing until you get the right pitch. He followed that up by saying that you don’t need an opinion on everything and only need an opinion on a few things.
In the talk at Georgetown University he follows with a famous analogy that he has also used before. Watch our video for footage of the interview:
“I’ve told students if when they got out of school they got a punch card with 20 punches on it and that’s all the investment decisions they get to make in their entire life, they would get very rich, because they would think very hard about each one and you don’t need 20 right decisions to get very rich., 4 or 5 would probably do it over time.
So quite simply with Warren Buffett’s 20 slot Punch Card, every time you make an investment you punch one of the holes and you only have 20 in your lifetime.
He follows on to say …
“I don’t’ worry too much about the things I don’t understand. If you understand some of these businesses that are coming along and can spot things, if you can spot an Amazon for example, I mean its tremendous accomplishment that Jeff Bezos has done, I tip my hat to him he’s a wonderful businessman, he’s a good guy too. But could I have anticipated that he would be the success and 10 others wouldn’t be. Am I good enough to do that. But fortunately, I don’t have to. I don’t’ have to form an opinion on Amazon. And I did form an opinion on Bank of America and I did form an opinion on Coca Cola.”
On Yahoo finance, Guru Focus has written an article in which they indicate that this points to several benefits:
We see a few benefits and rationales coming out of this type of strategy, such as the following:
- Wonderful businesses
- Investment decisions would be well-thought-out
- Trading being less active, meaning lower costs and fewer mistakes
- Long-term thinking would be reinforced
- Index-hugging would be avoided
Our opinion on the Warren Buffett’s 20 Slot Punch Card Investing Rule.
The idea of the 20 punches sounds great. What it does is force the investor to focus on every investment decision that they make. It stops the investor from jumping in on multiple average investments, which can only really be a good thing. However, Warren Buffett has also said that dollar cost averaging (investing regularly) into index tracker funds is the best option for most investors. This kind of contradicts with the punch card theory, although you could argue that dollar cost averaging into index tracker funds is just one decision and one punch. Perhaps the 20 hole punch card investing idea should not be taking so literally. The key takeaway is that it is important to be patient and thoroughly research every investment that you make.