Long-term investing: all about Warren Buffett’s 20-slot rule

Brad Holland


3 min read

Warren Buffett offers this key piece of advice to change the way you investwarren buffett- shutterstock

Often referred to as the “Oracle of Omaha”, Warren Buffett’s advice is devoured by everyone from seasoned professional investors to hopeful beginners – with good reason. Buffett is a self-made billionaire and one of the most famous of our time. In fact, he’s currently the third richest person in the world. Forbes estimates his net worth at $73.1 billion and it seems that almost everything the sage investor touches turns to gold. Which is arguably down to his 20-slot rule.

The 20-slot rule

Buffett’s career began as a teenager. In the 70 years since then, he’s made a large number of investments. But his 20-slot rule advocates restraint. In the lectures he delivers to avid business students, he often says:

“I 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. 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.” 1

Investing selectively

Buffett’s theory is that you would make more money from 20 investments than you would from 100, because you’d think more carefully about those 20 investments and be forced to take wiser decisions by having a finite opportunity to make money.

The principle behind this is clear – you need to be selective in your investments, apply thorough research to them and don’t just follow the crowd. If you focus all your attention on making sure each of your investments are carefully chosen – you’re likely to see better returns.

If you don’t have the time or expertise to pay your investment such close attention to detail, then you might like to consider a well diversified, low cost portfolio that can be managed for you. Here at Nutmeg, we use ETFs to construct our customers’ portfolios managed by our investment experts, as they are low cost, easy to trade and give access to markets globally. Past or future performance indicators are not a reliable indicator of future performance.

Becoming a specialist

Another way to do this is to specialise in a certain area. Rather than running from one trend to the next without building expertise, it can help to focus your attention on one area of investing and really develop your knowledge.

Those who are truly successful in their careers tend to have committed to one idea or area and dedicated themselves to making it work. As so many people find themselves distracted by the latest developments of our fast-moving world, those who take time to specialise and build up expertise really stand out from the crowd.

Investing time in your investments

Buffett also advocates that investors should view themselves as part-owners of the businesses in which they invest and take a long- term view. This way, you’re less likely to make whimsical decisions based on short-term market fluctuations. In particular, Buffett stresses the importance of choosing investments with a “wide economic moat” – the moat being “something that gives it a clear advantage over others and protects it against incursions from the competition”.

So, in the world according to Buffett, wisdom, patience and a long-term view are key.

 

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.

Source

1. Why Warren Buffett’s ’20-Slot Rule’ Will Make You Insanely Successful and Wealthy Inc. 22 July 2016

 

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Brad Holland

Brad is Nutmeg’s director of investment strategy. A veteran – 28 years at last count – in financial markets, he started his career as a professional economist at the Australian Reserve Bank. He now specialises in economic and financial market strategy within investment management. Brad studied post-graduate quantitative economics at the University of Queensland, Australia. Despite living in London for 20 years now as a naturalised British citizen, he’s still not quite ready to support England-v-Wallabies.


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