During the 1997 Berkshire Hathaway Shareholder Meeting, Warren Buffett and Charlie Munger were asked their thoughts on calculating intrinsic value. Here’s Munger’s response:
I would argue that one filter that’s useful in investing is the simple idea of opportunity cost.
If you have one opportunity that you already have available in large quantity and you like it better than 98% of the other things you see, you can just screen out the other 98% because you already know something better.
So that people who have a lot of opportunities tend to make better investments than people that don’t have a lot of opportunities, and people who have very good opportunities, and using a concept of opportunity costs, they can make better decisions about what to buy.
With this attitude you get a concentrated portfolio which we don’t mind.
That practice of ours, which is so simple, is not widely copied. I do not know why. Now it’s copied among the Berkshire shareholders. I mean all you people have learned it but it’s not the standard in investment management, even at great universities and other intellectual institutions.
If we’re right why are so many eminent places so wrong?
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