From the 2006 Berkshire Hathaway Annual Meeting:
In the real world, you have to find something that you can understand that’s the best you have available. And once you’ve found the best thing, then you measure everything against that because it’s your opportunity cost. That’s the way small sums of money should be invested. And the trick, of course, is getting enough expertise that your opportunity cost — meaning your default option, which is still pretty good — is very high.... Most people aren’t going to find thousands of things that are equally good; they’re going to find a few things where one or two of them are way better than anything else they know. And the right way to think about investing is to act thinking about your best opportunity cost.
Reviewing the comments from Buffett and Munger on opportunity costs over the years has made me make a slight change to my investment process. Now, multiple times a week I go over the key aspects and thesis (about a paragraph or two in length) for each of the things I am actually invested in. This serves two key purposes:
- Opportunity Cost: Like the quote from Munger above, it allows me to always have my opportunity cost at the top of my mind when looking at new ideas, thus helping to improve the idea-filtering process.
- Disconfirming Evidence: By constantly reviewing my reasons for owning something, I hope to be able to more quickly identify evidence that may opposed to those reasons, thus increasing my ability to recognize mistakes faster as well as using the practice of searching for disconfirming evidence as a way to train myself to be more objective.
For those looking to grow a money management business, it can also help in one's marketing efforts. While many people may want to conclude that just finding great ideas will lead to a successful business, or that being able to tell every bit of minutiae about a given holding can display one's skill—the truth is that more often than not, being able to clearly articulate the key points in a thesis is what will get someone's initial attention. From there, the level of detail one goes into will vary by potential investor, but showing some clarity helps the marketing which helps drive one's business. And as Ben Franklin said, "Drive thy business or it will drive thee."