“I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. 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.”
Having recently looked though my investing journal, I noticed my own occasional “toe-dipping” investing behavior. I would identify a security, study it, find it suitable for investing and buy a relatively small amount of it. Perhaps I thought that the price could decline further, giving me an opportunity to buy more. Perhaps I was concerned that a large position may result in a large loss. What often happened, however, was that the price would increase and having refused to add to my position at higher prices, I would end up with a small amount of a winning stock. In percentage terms, I did well. In absolute terms, however, I did not make as much money as I wanted.
Other times I would over-diversify. When investing, I would buy securities in addition to those I really liked, just to spread the risk among more names. Again, often my best ideas would do well and the ideas further down on my list would do less well, lowering total performance.
Having identified this investing behavior, I imposed a minimum on all my investments. I decided that I would not take any positions less than 2% of my portfolio. This worked well. The rule forced me to do double- and triple-check the facts, explore hypothetical scenarios that could kill my investment and focus even more on margin of safety. I guess this was my own version of a “punch-card” strategy.
It appears to me that a “punch-card” approach can also be helpful outside the investment arena. Similar selectivity may help when selecting business projects; limiting one’s business activity to a few high-quality projects may result in higher success rate and greater degree of success when it is achieved. Similarly, pursuing only the most worthwhile hobbies may result in more time available for, and more enjoyment derived from, each hobby. Same logic can apply to friends and romantic interests.
Have you tried the “punch-card approach?” In what area?