Punch card investing in the stock

He practices value investing as taught by Warren Buffett and generally has no more than a handful of positions, that he aims to hold for long time horizons. There are just around eight stocks in his portfolio. If there is significant edge, it can be surprising how large the position sizes are that the formula pumps out. In the real world of portfolio management, Prabai explains, an investor should employ a margin of safety and can reduce volatility by under-betting the Kelly Formula and investing in more than one favourable opportunity at a time.

He himself tends to allocate equal weight to all his positions. In his lectures, Pabrai tells the story of UK fund manager, Nicholas Sleep appropriate name you might think! After generating stellar returns, he decided to hang up his boots in and returned the money to his clients, simply advising them to buy the same three stocks themselves. Complex products, with layers of screening and risk monitoring, sell; funds with a handful of stocks in them which are never trimmed, generally speaking, do not.

Munger asked her how she decided to do that. There are many styles of investing that can work. Our goal at Project Punch Card is to foster long-term investment orientation among students underrepresented in the investment research and management business. The conference will be all about the long term. What is long-term value investing? How is it different from other investing? Does it provide an edge?

Why should one choose long-term orientation? How can students think long-term especially while investing?

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But largely, I think Hempton is exactly right that most managers are biased toward activity. I also think many managers might not even consciously realize this bias. They intuitively want to convey to their clients that they are working hard, and one of the only ways to measure work progress from the perspective of the client is by looking at activity within the portfolio.

Some investment managers fear their clients think like this: Lots of activity: the manager must be busy looking at lots of ideas No change in the portfolio since last quarter: what has this guy been doing for three months? And why am I paying him?

Also, during a period of underwhelming performance, it can be difficult to stick with this approach. As Hempton says, these times can be extremely productive from a learning point of view: But mostly I would have been just idle. So in the midst of underperformance a client might ask me what I did last year and I would say something like a I read 57 books b I read about sets of financial accounts c I talked to about 70 management teams and d I visited Italy, the UK, Germany, France, Japan, the USA and Canada This is such a great point.

Instead, I can conduct my research efforts each and every day, and wait for opportunities. That said, I can improve on focusing more on my best ideas, and I try each year to get better at this. The Concept Matters Let me say that the concept is what is important here, not the actual number of punches. Buffett selected 20 as an example. Obviously, Buffett has made hundreds of investments over the years. He once said at an annual meeting that his partnership from made somewhere around investments in various stocks.

The key for Buffett was not his batting average, but his slugging percentage. He hit a lot of home runs in the stocks that he took big positions in. By that point in his career, he was fully implementing the punch card approach, probably in large part because of his review of his partnership where he realized only a few big ideas were responsible for the entire performance record. But again, there is no magic number that should be focused on.

Trading activity has a way of making clients think that work is actually getting done. However, trading activity is almost always inversely correlated with investment performance. The client would be better off with the manager who charged his or her fee for selecting the punch card investments and then just sitting and waiting. Bias Toward Activity But human nature is difficult to overcome, and this type of an approach is difficult to implement.

There are a few: Norbert Lou who fittingly runs a fund named Punch Card has built an outstanding track record of beating the market handily while making very few investments his current portfolio consists of just three stocks and he makes very few new investments.

Hempton mentions that even Buffett's two portfolio managers Todd Combs and Ted Weschler don't follow a true punch card approach. In fact, the majority of Weschler's performance can be traced to two large investments that he owned throughout the life of his fund: DaVita and WR Grace. You could argue that those two investments were in large part responsible for his landing of a position at Berkshire.

So there are a few out there who walk the walk. But largely, I think Hempton is exactly right that most managers are biased toward activity. I also think many managers might not even consciously realize this bias. They intuitively want to convey to their clients that they are working hard, and one of the only ways to measure work progress from the perspective of the client is by looking at activity within the portfolio.

Some investment managers fear their clients think like this: Lots of activity: the manager must be busy looking at lots of ideas No change in the portfolio since last quarter: What has this guy been doing for three months?

And why am I paying him? Also, during a period of underwhelming performance, it can be difficult to stick with this approach. As Hempton says, these times can be extremely productive from a learning point of view: But mostly I would have been just idle. So in the midst of underperformance a client might ask me what I did last year and I would say something like a I read 57 books b I read about sets of financial accounts c I talked to about 70 management teams and d I visited Italy, the UK, Germany, France, Japan, the USA and Canada This is such a great point.

That type of workload will produce measurable results at some point in the future, but it won't show up in this quarter's statement that clients receive. I try and focus on getting better each day, regardless of whether I'm buying or selling anything. And in fact, the days I feel I've improved the most as an investor are usually the days where I am away from my computer screen deep in thought, reading something useful, or having productive conversations with someone that knows more about a particular business than I do.

Fortunately, I happen to have great clients who don't expect activity from me, so I don't feel any pressure to "come up with new ideas. That said, I can improve on focusing more on my best ideas, and I try each year to get better at this. The Concept Matters Let me say that the concept is what is important here, not the actual number of punches. Buffett selected 20 as an example. Obviously, Buffett has made hundreds of investments over the years.

He once said at an annual meeting that his partnership from made somewhere around investments in various stocks. But he also said that the vast majority of those investments were small investments that didn't have a significant net benefit to his returns.

The key for Buffett was not his batting average, but his slugging percentage. He hit a lot of home runs in the stocks that he took big positions in. And even in the 70s and 80s when he was running a much larger portfolio, his best ideas made up a sizable portion of his portfolio.

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You need to be able to buy up a boatload of these investments. Please note that these 20 punch card investments would be considered active investments. These punch card investments need to be like shooting fish in a barrel. On the few occasions when you come across one of these investment opportunities, it needs to be so obvious that it should be purchased, it should be like shooting fish in a barrel. In other words, it should be a no-brainer.

These investments should have a few commonalities. In other words, you should be able to understand what the business does and the economics of the business and the industry. The company should have favorable long-term economics. In other words, it should have an economic moat around it that allows it to achieve high returns year after year. Stated a little differently, management should be good at their jobs and honest. You may think that you have a great business on your hands, but if people at the helm are steering the ship the wrong way, it may all end in disaster.

The second part of punch card investing is just as important. I also think many managers might not even consciously realize this bias. They intuitively want to convey to their clients that they are working hard, and one of the only ways to measure work progress from the perspective of the client is by looking at activity within the portfolio. Some investment managers fear their clients think like this: Lots of activity: the manager must be busy looking at lots of ideas No change in the portfolio since last quarter: what has this guy been doing for three months?

And why am I paying him? Also, during a period of underwhelming performance, it can be difficult to stick with this approach. As Hempton says, these times can be extremely productive from a learning point of view: But mostly I would have been just idle. So in the midst of underperformance a client might ask me what I did last year and I would say something like a I read 57 books b I read about sets of financial accounts c I talked to about 70 management teams and d I visited Italy, the UK, Germany, France, Japan, the USA and Canada This is such a great point.

Instead, I can conduct my research efforts each and every day, and wait for opportunities. That said, I can improve on focusing more on my best ideas, and I try each year to get better at this. The Concept Matters Let me say that the concept is what is important here, not the actual number of punches. Buffett selected 20 as an example. Obviously, Buffett has made hundreds of investments over the years.

He once said at an annual meeting that his partnership from made somewhere around investments in various stocks. The key for Buffett was not his batting average, but his slugging percentage. He hit a lot of home runs in the stocks that he took big positions in. By that point in his career, he was fully implementing the punch card approach, probably in large part because of his review of his partnership where he realized only a few big ideas were responsible for the entire performance record.

But again, there is no magic number that should be focused on. Great ideas are rare, should be patiently waited on, and should be capitalized on when they come.