The Idea

Warren Buffet preaches that he could: “Improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches — representing all the investments that you got to make in a lifetime.”

Once you punched through the card, you couldn’t make any more investments at all. Buffett said that, “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.”

How to Put it in Practice

By Buffett’s own admission, his lifetime track record can be boiled down to perhaps 20-30 great investing decisions. Without those great decisions, Berkshire Hathaway, his holding company, wouldn’t be the $475bln giant it is now.

In practice, this means that an intelligent investor needs to make on average just 1 great investment decision a year. Chasing after marginal business ideas with modest upside and spreading the capital thin over numerous investments is unlikely to produce exceptional outcomes.

For an investment idea to be that great, it usually is a no-brainer. So any seemingly “great” ideas that require a lot of thinking, elaborate analysis, and long-term projections (aka guesswork) won’t in all likelihood qualify.

A truly great investing idea typically possesses 3 attributes:

  • It is based on a clear and understandable logic or insight;
  • There is a high likelihood of a favourable outcome based on objective facts and evidence;
  • The investor is protected by a demonstrably wide margin of safety between the purchase price and the underlying intrinsic value.

If and when one sees such an opportunity, one is wise bet  and to bet heavily.