Warren Buffett's 20 Ticket Punch Card

A Mental Technique to Help Investors Be More Selective in Building a Portfolio

Warren Buffett 20 Ticket Punch Card
Warren Buffett has long told college student and investors that if they behaved as if they had a 20-ticket punch card that had to last them for life - and the moment that punch card ran out, they could make no more investments - they'd dramatically improve their investing results because they'd think long and hard about committing to a stock, business, or piece of real estate before they laid out cash. Chip Somodevilla / Getty Images News

It's no secret that billionaire investor Warren Buffett has one of the best investing track records in history.  From starting a handful of investment partnerships that were early versions of a modern day hybrid hedge fund and private equity fund to building an old textile mill into one of the world's largest holding companies, Buffett and his business partner, Vice Chairman Charlie Munger, have often talked about how they made most of their money in a handful of really great businesses.

 They didn't seek diversification for the sake of diversification even though they always were attempting to diversify their income sources.  Rather, they exercised extraordinarily levels of patience, sometimes sitting on large cash reserves in their portfolios for extended periods of time until something intelligent came along for them to buy.  The best of these investments, such as their stake in The Coca-Cola Company or Wells Fargo & Company, have sat on the balance sheet for decades, taking advantage of the power of compounding and deferred taxes.

When asked about their investing strategy, Buffett often has a handful of key pieces of advice he shares.  These include:

  • Avoid using large amounts of leverage to buy stocks or speculate in the capital markets.  If you're smart, you don't need it and if you're dumb it can hurt you.
  • Only buy things you understand.  (Legendary investor Peter Lynch put it as, "Invest in what you know".)  Dive into the Form 10-K and annual report.

    Aside from this, there is something that Warren Buffett also repeats that doesn't get a lot of coverage in the press though it is extraordinarily profound.  Since at least the 1990s, when visiting college students and giving advice on how to get rich, Buffett has often said, "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."

    Why? Too often investors throw money around like scattering seed, saying to themselves, "I'll throw a little here and little there to see what happens." Instead, Buffett advocates a policy of finding the best and richest soil, planting substantial amount of seed in it, and protecting it.

    This policy may sound simple, and it is. It also can be life changing. Lou Simpson, one of the best investors in the world and head of GEICO's equity portfolio, once said that this particular Buffett strategy helped him enormously in his record of crushing the market over several decades.