This Warren Buffett Quote Changed My Life

by JT McGee

Warren Buffett’s simple insights are often misunderstood or misinterpreted, such as his all-in “bet on America” that was really anything but.

My favorite Warren Buffett quote cannot be taken out of context. You really cannot miss the point of this gem:

You should approach investing like you have a punch card with 20 punch-outs, one for each trade in your life. I think people would be better off if they only had 10 opportunities to buy stocks throughout their lifetime. You know what would happen? They would make sure that each buy was a good one. They would do lots and lots of research before they made the buy. You don’t have to have many 4X growth opportunities to get rich. You don’t need to do too much, but the environment makes you feel like you need to do something all the time.

One Idea Per Year

Buffett always talked about his biggest goal: finding that one big new idea each year. From his early partnerships to his annual letters at Berkshire, he stressed getting one very big thing right every once in awhile.

GEICO was one of his biggest ideas, one in which he invested 75% of his net worth at one time. GEICO sold direct to the consumer, cutting out salespeople to become a low cost supplier in a market where people only care about cost. It solidified Buffett’s status as a billionaire.

In his later years, he got one thing right with Coca-Cola, realizing that more people were drinking Coke products, and that the people who drank Coke last year would drink more in each subsequent year. It’s such a simple idea, but it provided huge compound annual growth well above the returns of the index.

Thinking Differently

The great thing about Buffett’s perspective is that it hits on two critical parts of the investment process. It requires that investors find a stock they believe to be so good that it’s a twenty-times-in-a-lifetime opportunity. It also requires that every investment be held for a very long time, since buying and selling are two different transactions, and selling does count as a trade.

If you follow this thinking through to its logical conclusion, you think like Buffett. First, you concentrate into only a handful of stocks. Secondly, you only buy great businesses that can compound your money for a very long time since each trade is one you can never get back. Third, you buy and hold for a very long time because selling too soon costs you a very valuable punch on your trading card.

We all know what happens when you compound a penny every day for a month. It turns into something like $10 million.

The point of that anecdote isn’t about pennies or compounding money daily. It’s about the incredible returns that can be accomplished from doubling something 30 times, whether it’s over a single month or a full lifetime.

Mr. Market Only Has to Mess up 20 Times

I’m only 22 years old. I’ll likely invest for a very long time, but let’s say I quit (or get hit by a bus) when I’m 75 years old.

If my math checks out, that’s 53 more years of Wall Street.

Mr. Market will miss an opportunity over the next 53 years. Mr. Market will present plenty of stocks that could double or triple my net worth.

How many do I need over 53 years? Not many. Not many at all – even a paltry sum of $1,000 doubled 20 times is more than a billion bucks.

Maybe I’m just an insane optimist, but something tells me that Mr. Market will make more than 20 errors over the next 53 years. I just have to be patient enough to wait, and opportunistic enough to go all-in.

{ 6 comments… read them below or add one }

Mike Collins November 14, 2012 at 09:16

Another aspect of this quote is that assuming you did your research and are comfortable that your stock will hold up over the long-term, you can weather losses in the short-term. Too many people constantly jump in and out of the market based on what the talking heads are saying from day to day. They buy a good company and then bail out the first time it drops a few points, only to miss out on the long-term gains when it bounces back.

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JT McGee November 14, 2012 at 13:42

Right – if you only have a few trades in your lifetime, every single one must count, so you hold longer. I can’t imagine piling into a stock and the moving out that quickly, but I guess people do it.

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Thomas S. Moore November 14, 2012 at 09:50

In general it works but you have to get people to let go of emotional ties to both stocks and money. Realize that the stock will go up and down the longer you hold it. You take profits on the way up and buy more on the way down. The key is still trading but trading a good company.

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JT McGee November 14, 2012 at 13:45

Do you do this in your own portfolio?

I can’t say I’ve ever traded a stock in any capacity. Usually I have to love it cheap, and then hate it pricey. Occasionally I’ve moved money from companies that are very close to my valuation (say, 10% undervalued) to companies I find more undervalued (say, 50% undervalued) but insofar as moving in and out of a stock independently, it’s not something I’ve ever done.

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krantcents November 14, 2012 at 12:27

I think the concept of making good, well thought investment decisions is what everyone should do. Thinking in terms of just 10 or 20 choices is also good to provide discipline in your choices. I find when I ask my class to express themselves in very few wqords, they choose better words. You still have to start early because no matter what, you will make mistakes.

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JT McGee November 14, 2012 at 13:46

This is a great tangential point. You know, if you think about it, there are probably only like 20 major decisions that you have to get right in personal finance to be a millionaire. Actually, there are probably fewer than that – education, home, savings, spending. Four things and you’re set!

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