Buffett’s Advice For A Good Night’s Sleep

The Motley Fool Last week, Motley Fool Singapore was invited to participate in Singapore Investment Week (SIW), which is organised by Securities Investors Association (Singapore) – better known to most of us as SIAS.

In my view, there can never be enough events such as SIW, which highlights the importance for all of us to take charge of our long-term finances. It should be said that the Singapore government has made great strides to put in place the foundation stones for our long-term savings through the Central Provident Fund. But we need to do more for ourselves if we are to ensure that our savings keep pace with inflation, which was the theme of my address at Singapore Investment Week.

What every investor wants

Truth is, we all have different needs and wants. That inevitably means that we also have different aims and objectives. Some of us may want to be rich beyond our wildest dreams so that we can retire before we light the fiftieth candle on our birthday cake. For others it is simply to be financially comfortable when we decide to hang up our boots.

Whatever our aims it is important to ensure that our long-term savings meet our financial needs when we decide to stop working. In my view, investing in shares is one of the most efficient ways to do this.

However, with the huge number of stocks to choose from, it is easy to become overwhelmed by the plethora of choice. The temptation is buy anything and everything that is suggested to us, which could be as bad, if not worse, as not buying anything at all.

The 20 ticket punch card

In this regard I am reminded of Warren Buffett’s “20 Ticket Punch Card” rule.

Buffett once said that he could improve everyone’s financial position by giving us a ticket with only 20 slots. Every time we buy shares in a new company our card gets punched.  But after 20 punches, we are done – we are not allowed to add any more companies to our portfolio, ever again!

It is probably true to say that Buffett has owned shares in more than 20 different companies since he started investing. However, his point is that we should understand what we are investing in; why we are buying the shares and most important of all, the price that we are paying for the investment.

Thing is, if we only get 20 investing choices in our lifetime, then we are likely to be more careful about what we buy. As a result we may value each investing decision more cautiously rather than adopting a scatter-gun approach and buy everything in sight. That means taking more time over each decision and factoring in a sufficient margin of safety, which is our insurance policy against getting things wrong.

How to sleep well at night

Interestingly, two investors can own shares in the same company and yet one can sleep at night while the other is constantly checking the share price. The reason is that one has built into his investment a larger margin of safety because he or she knows more about the company. Meanwhile the other investor has bought shares in the same company for no other reason other than because it is going up.

Here at Motley Fool Singapore, we are great believers in helping investors understand the business behind the share. We believe that there is no greater protection in investing than a high level of knowledge. That means knowing as much about the business as possible – learning about the products that a company makes, its shareholding structure, its markets and its customers to name just a few.

But sometimes it can be as simple as picking up the annual report. By doing nothing else other than reading the chairman’s statement you are putting yourself in a better position than the investor whose knowledge about the company is limited to whether the share has gone up or down in price.

As for me, I never have trouble getting to sleep at night. I have every confidence in the companies I invest in; I believe that I know everything I need to know about the business, and my margin of safety is the cushion of comfort that I rest my head on at night.

This article first appeared in Take Stock – Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.