Lessons from Warren Buffett: 'The rule of 20 punches'

Be patient and pick your battles, says Faisal Butt.

by Faisal Butt
Last Updated: 26 Apr 2018
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Down to business

Entrepreneurship is a high-stakes game. Every major investment decision you make matters a great deal. Over a period of time, whether we get those decisions right or wrong can mean the difference between a trajectory of success or a downward spiral of failure. 

With the sheer volume of opportunities facing the modern-day entrepreneur and investor, it is easy to drown in this sea of options. How do we weigh one against another, how do we prioritise? Without a framework for decision making, the leader can miscalculate and misfire, sometimes with unsalvageable consequences.  

The Rule of 20 Punches

After burying myself in Warren Buffett’s biography Snowball, I’ve slowly become a devotee of the Oracle of Omaha’s framework for decision-making, known as the ‘Rule of 20 Punches’.

In his own words, ‘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.’

The essence of the rule is that if you knew you had a finite number of major decisions you could make in a lifetime, you would take the time to make better decisions, and you would ultimately make bigger decisions. Your odds of success dramatically improve when you are forced to direct all your energy to fewer tasks. You have to ruthlessly trim away good ideas to make room for the great ones.

Discipline

A key part of the 20 punch rule is to have the self-restraint to ignore what’s ‘trending’ with other investors and entrepreneurs. Savvy business people will stick with what they know and do it well. This ultimately requires being rather stoic in nature: saying no to most things, and yes to the very few. Even if it means a period of inactivity.

This requires extraordinary discipline. Many management teams come and pitch to me with immense promise. An excellent idea, an experienced team, and a scalable solution to a well-known problem. However, if I do not understand the business, or I am unfamiliar with the sector, technology, or business model, I must have the will power to politely decline and opt out. I can’t afford to lose one of my 20 punches.

In the few cases where I say yes, I’m not interested in tinkering around the edges; if I choose to invest, it’s because I’m going to ‘load up’ (using Buffett’s phraseology) and go all in. I can only do that effectively if I remain selectively focused on a few projects with large potential.

Long Term Thinking

Buffett also once said, ‘Someone's sitting in the shade today because someone planted a tree a long time ago.’ This long-term mind-set is perhaps best exemplified in his investment in Coca Cola in 1988, a company he has never sold a single share in. In 1988, Coca Cola shares sold for between $2 and $3. They are now worth around $43 each. 

Having this long-term foresight requires incredible patience. Coca Cola has faced many crashes in the meantime with shares going from $43 in 1998 to $19 in 2004. With the long-term hold strategy, investing in reliable businesses that you know, it is easy to see why this strategy has been a success. 

This long-term perspective is perhaps best summarised in Buffett’s statement below: ‘In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.’

Most entrepreneurs struggle with patience, particularly in youth. When your reference point is so narrow, it can be difficult to see the bigger picture. The one thing that you can rely on is economics. Reliable, well-run businesses will grow over time. Trust your analysis and hold on for the long term. Get rich quick schemes rarely work; economics is far more reliable. 

Final Thoughts

There is a saying that you should observe the masses and do the opposite. When there is impatience, practice patience; when people are concentrating on the many, concentrate on the few. Invest sparsely, but when you do invest, go big. Do not obsess over speed - the quest to create wealth is a marathon, not a sprint. It’s about making the right investments and right choices, over many decades.

In a way, everyone is holding a ‘life punch card.’ You only get so many punches during your time on this little planet. Time, like the slots on a punch card, is finite and irreversible. Don't waste your next slot. Think carefully, make a decision, and go all in. Don't just dabble and tinker. Go all in.

Faisal Butt is the CEO of Spire Ventures, a property focused private equity boutique, and the Founder and Chairman of Pi Labs, Europe’s leading proptech venture capital firm.

Image credit: Peter Dedeurwaerder/Shutterstock

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