Every decision you make comes with the chance of being wrong. Being wrong isn’t something we like to think about, but it matters.
Limiting your decisions, those potential points of failure, can improve your portfolio returns. It definitely impacts your costs, your free time, and your sanity.
So a good goal would be to streamline your investment process to the fewest possible (bad) decisions.
One simple suggestion is to your extend your holding period (and maybe your strategy). Trading, willfully or not, forces you into a three decision process where you need to be right each time: deciding what to buy, when to sell, and what to buy next. You remove two decisions if you never plan to sell.
Essentially, Buffett did this as he transitioned from Graham’s cigar butt approach to his punch card idea.
Finding cigar butts worked great for Buffett during his partnership years. But it has one big downside. Churn. It starts with the expectation of selling. Churn means three decisions – he had to find a cheap stock, the price to sell it at, and a new cigar butt after the sale – and three times to be wrong.
Buffett’s 20 punch card sets a limit on his decisions:
I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. 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. – Warren Buffett
Buffett takes this a step further by saying his “favorite holding period is forever”.
Of course, forever doesn’t always work out. Even good companies fall from grace. And Buffett’s 20 punches were exhausted decades ago.
But his idea of 20 punches helps reinforce making fewer decisions and limiting those to only your best decisions.
- Is Wall Street Eating Your 401(k) Nest Egg? – NPR
- Get Used to It. Low Rates Are Here to Stay. – N. Smith
- Correlations Can Be Predictive – L. Swedroe
- The Free-Will Scale – Aeon
- Masters in Business: Jeremy Siegel (Podcast) – Bloomberg
- Jason Zweig on Writing, Risk, and Why Historical Perspectives Matter (Podcast) – Farnam Street
- Why Americans Don’t Trust the Fed – R. Lowenstein
- You’re Not Supposed to Understand the Federal Reserve – NY Times
- Bill Gates: We Need an Energy Miracle – The Atlantic