“I always tell students in business school they’d be better off when they got out of business school to have a punch card with 20 punches on it. And every time they made an investment decision, they used up one of their punches, because they aren’t going to get 20 great ideas in their lifetime. They’re going to get five or three or seven, and you can get rich off five or three or seven. But what you can’t get rich doing is trying to get one every day.”
Around a year ago, I decided to conduct an exercise and build a hypothetical 5-punch card portfolio, inspired by Warren Buffett (Trades, Portfolio)’s punch card rule. I think that the most significant benefit of the punch card for investors is to reinforce rigid, ultra-long-term decision-making.
My stock-picking strategy for the portfolio was, therefore, to concentrate on U.S. businesses with attractive economics, wide moats and massive runways for growth in the industries that face little disruption, enjoy long-term tailwinds and (hopefully) do good in society. Back then, the five picks were:
1) Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), one of the greatest long-term capital allocators,
2) Nike (NKE, Financial), the world’s most famous sporting goods leader,
3) Clorox (CLX, Financial), the mid-category cleaning product leader that keeps corporate social responsibility in mind,
4) Domino’s Pizza (DPZ, Financial), a pizza delivery franchisor, and
5) Rollins (ROL, Financial), a global leader in pest control.
Now one year has passed, and I am conducting an annual check. If you are interested in monitoring the portfolio, you can find it here. Feel free to comment.
Between April 12, 2019 and April 11 of this year, the 5-punch card portfolio, if constructed on an equally-weighted basis at the inception, would have delivered a total return of 6.88%, with dividends included but not reinvested. The hypothetical performance beats the 2.12% loss of the S&P 500 during the same period by a wide margin. Below is a brief breakdown in terms of stock and business performances. Please note that the revenue figure of Berkshire excludes the items of “Investment and derivative gains/losses.”
| Total Return (1-year) | Revenue Growth (1-year) | |
| Berkshire Hathaway | -7.94% | 2.74% |
| Clorox | 21.13% | 1.47% |
| Domino’s Pizza | 34.46% | 5.42% |
| Nike | 1.72% | 7.47% |
| Rollins | -14.97% | 10.65% |
As you can see, Rollins was the top laggard of the year, while Clorox and Domino’s Pizza considerably outperformed and Berkshire and Nike were the two closest “index trackers.” Of course, in the short run, the stock price is simply the output of a voting machine, but I feel the underperformance with Rollins was primarily due to the overvaluation in the first place. The valuation of the stock came down 20%-30% over the last year, while the business increased its top line at a double-digit rate. The company has a simple but highly-effective growth strategy based on consolidation in a fragmented space. At the same time, the international expansion adds to the growth prospect. Significant insider ownership can be one of the reasons why Rollins has always been expensive.
I have no doubt that Berkshire is going to do well, even without Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) one day. Meanwhile, I expect that the company may not be doing as well as in the past, given the size disadvantage.
I firmly believe in the value of sports with regards to the advancement of global society, and hence, the pick of Nike - the well-moated leading brand with increasing exposure in emerging markets such as China.
Domino’s Pizza has been demonstrating strong momentum leveraging its powerful franchise model – what can be better than using others’ capital for free to grow your own business?
Lastly, I certainly do not expect the extraordinary share performance of Clorox to sustain for the long run. The “virus” stock hit the media frequently this year and had one of its best years at least in a decade, thanks to temporarily elevated sales due to Covid-19.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Berkshire Hathaway, Rollins, Nike, and Domino’s Pizza.
Read more here:
- Urbem's 'Wonderful Business' Series: ATOSS Software
- 3 Categories to Hedge Inflation
- Takeaways From the 2020 Fundsmith Annual Meeting
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