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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, well, 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 and people who have very good opportunities and using a concept of opportunity cost 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 merch shareholders. I mean all of you people have learned it but it's not the standard in investment management even at great universities and other intellectual institutions. you. Very interesting question.
If if we're right, why are so many eminent places so wrong? There are several possible answers to that question. Yes. The uh the attitude though, I mean, if if if somebody shows us a business, you know, the first thing goes through our head is would we rather own this business than more Coca-Cola? Would we rather own it than more Gillette?
We It's It's crazy not to compare it to things that you're very certain of. There's very few businesses that we'll find that we're certain of the future about as as as companies such as that. And therefore we will we will want companies where the certainty gets close to that. Uh and then we'll want to figure that uh we're better off than just buying more of those.
If every management uh before they bought a business uh in some unrelated field that they might not have even heard of, you know, more than a short time before that's being promoted to them, but they said, "Is this better than buying in our own stock?" you know, is this better than even buying, you know, buying Coca-Cola stock or something?
There there'd be a lot fewer deals done, but but they don't they tend not to measure uh we try to measure against what we regard as as close to perfection as we can get Charlie. Well, I will say this that the concept of intrinsic value used to be a lot easier because there were all kinds of stocks that were selling for 50% or less of the amount at which you could have easily liquidated the whole corporation if you owned the whole corporation.
Indeed, in the history of Berkshire Hathway, we bought things at 20% of of then liquidating value. And in the old days, the Ben Graham followers could run their Geiger counters over corporate America and they could spell out a few things and you could easily see if you were at all familiar with the market prices of of whole corporations that you were buying at a huge discount.
Well, no matter how bad the management, if you're buying at 50% of asset value or 30% or so on down, you have a lot going for you. And uh and as the world has wised up and as stocks have behaved so well for people that stocks generally have gone to higher and higher prices, that game gets much harder.
Now to find something at a discount from intrinsic value. Those simple systems ordinarily don't work. You've got to get into Warren's kind of thinking. And that is a lot harder. I think you can predict the future in a few places best if you understand a few basic ideas that come from a good general education.
And uh and that's what I was talking about in that talk I gave at the USC business school. In other words, Coca-Cola is a simple company if it's stripped down and analyzed in terms of some elemental forces. It's hard to understand Costco either. You know, I mean, there are certain fundamental models out there that do not take you don't have the kind of ability that quantum mechanics requires.
You just have to know a few simple things and really know them. Charlie talks about liquid. He's not talking about closing up the enterprise, but he's talking about what somebody else would pay for that stream of cash, too. I mean, I mean, if if you could have looked at a collection of television stations owned by a cap cities, for example, in the in the early, well, 1974, and it would have been worth, we'll say, four times what the company was selling for.
Uh, not because you'd close the stations, but just that their stream of income was worth that to somebody else. It's just that the marketplace was uh very distressed depressed. Although like I say on a negotiated basis you could have gone and sold the properties for four times what the the company was selling for and you got wonderful management and I mean those things happen in markets they will happen again at uh uh but part of part of investing and calculating intrinsic values is if you get the wrong answer when you get through and other words if it says don't buy you can't buy just because somebody else thinks it's going to go up or because your friends have made a lot of easy money lately or anything of the sort.
You just you have to be able to uh to walk away from anything that doesn't work and and very few things work these days. You also have to work walk away from anything you don't understand which in my case is a big handicap. But you'd agree, wouldn't you, Warren, that it's much harder now. Yeah. But I would also agree that almost at any time over the last 40 years that we've been up on a podium, we would have said it was much harder in the past.
But it it is harder now. It's way harder. It part of part of it being harder now, too, is is the amount of capital we run. I mean, if if we were running $100,000, our prospects for returns would be and and and we really needed the money. Our prospects for return would be considerably better than they are running Bergkshire.
It's just it's it's very simple. Our universe of possible ideas would expand by a huge factor. We are looking at things today that by their nature a lot of people have to are looking at and and there were times in the past when we were looking at things that very few people were looking at. But there were other times in the past when we were looking at things where the whole world was just looking at them kind of crazy and and and that that's a decided help.
Zone three, you look at a corporate stock, it's obvious you can buy any majority of government bond you want. So, one opportunity cost of buying the stock is to compare it with the bond. Well, you may find that half the stocks in America you're so fearful about or know so little about or think so poorly of that you you'd rather have the government bond.
So on an opportunity cost basis, they're taken out of the filter. Now you start finding corporations where you like the stocks way better than than government bonds. You got to compare them one against the other. And when you find one that you regard as the best opportunity that you can understand as the best opportunity, now you've got one to buy.
It's a very simple idea and it it it uses nothing but the most elementary ideas from from uh from economics or game theory. It's it's just it's it's child's play is a mental process. Now, it's hard to make the business appraisals, but the mental process is essential. If Charlie and I were forced told we had a choice of buying stock A, B, C, or D and all 2,500 or 3,000 or whatever may be listed on the New York Stock Exchange or buying a 10-year government bond and we had to hold the stock for 10 years or the bond for 10 years.
Probably in at least 80% of the cases we we take the 10-year government, you know, many cases because we didn't understand the business well enough elsewhere. Secondly, we may understand it and still prefer the 10% government. But we would measure everything that way and and uh I don't know what did you come up with 80% or where Charlie desert island 10 years get to fondle a stock certificate or fondle a government bond which one you going to choose but I think life is a whole series of opportunity cost you know you got to marry the best person who is convenient to find will have you you know investment is much the same sort of a process. I knew we'd get in trouble after lunch. Zone two.
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