Warren Buffett (Trades, Portfolio) is fond of using the "punch card" analogy when talking about investing. He argues investors would produce radically better returns during their lifetimes if they were given a punch card with 20 slots in it. Each slot represents an investment, and every time you invest, you punch a hole. When you run out of holes, you can't make any more investments. According to Buffett, by severely restricting the number of decisions available, investors would be forced to think a lot more deeply about their actions.
There’s a two-pronged logic here. First, by eliminating even the possibility of having to make a lot of investment decisions, you eliminate the various distractions that may be competing for your attention. Second, having a finite number of available decisions forces you to really commit to the ones that you do make, concentrating your portfolio.
I’m obviously not suggesting that investors should go out and do this - it would be unrealistic and unenforceable. As with many Buffettisms, it’s not meant to be taken literally. For me, the punch card argument is interesting because of what it says about the decision-making process of the average investor: people think about too many things and not deeply enough about the things that matter.
Why do people find it difficult to think deeply?
The most obvious answer to this question is that we are bombarded by stimuli from every angle. Modern life has brought us many marvelous conveniences, but it has also brought us many "informational viruses" - media that competes for our attention, but that offers little in the form of useful data. This is true of all walks of life, but I think it’s especially true in investing.
Many well-known value investors have expressed the opinion that the ability to get real-time quotes on stocks and portfolios in the stock market is a significant driver of emotional thinking. When you buy a house, you don’t think about how its price might fluctuate over the course of a single day. You might get it appraised once every five years, if that. But with publicly traded stocks, investors are constantly receiving updates on the value of their holdings. This is a prime example of information that ultimately is not particularly useful, but clouds judgement.
Too many choices
Another problem for investors is the explosion in both the number of assets available to invest in and the ease of doing so. While this sounds like a good thing, I actually believe it to be detrimental to investment performance, as it has created a "needle in a haystack" environment.
And the hay has been piled extremely high. It is now easier than ever for brokerages to part undiscerning customers and their money. Just today, it was brought to my attention that a mobile trading platform offers investors the ability to trade in cryptocurrency derivatives with leverage, which just sounds like the holy grail of bad ideas. To make matters worse, this particular platform also offered investors the ability to passively replicate the trades made by other users. What could possibly go wrong?
Investors could benefit from applying the spirit of Buffett’s punch card advice and focusing their thinking on a small number of important decisions, rather than a large number of unimportant decisions.
Read more here:
- Berkshire Hathaway Is More Like a Bank Than You Think
- Seth Klarman: This Is Where Opportunities Are Found
- This Is the Difference Between Good and Bad Investors
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