After so many years of investing, has your investment return beaten the index? If not, then at least it should have beaten government bonds, right? What? It didn’t? Then your opportunity cost is huge.
In Buffett’s view, if your investment return can’t beat government bonds over the long term, why not just buy government bonds? Here, government bonds are your opportunity cost.
Duan Yongping holds the same view: The minimum opportunity cost in investing is the risk-free government bond yield.
Compared with ordinary businesses, Charlie Munger prefers good businesses, and Munger’s standard for opportunity cost is higher. In his view, any investment decision must use your current best investment as a ruler to measure all other opportunities. If you already have a better investment, and a new opportunity simply can’t compare with what you already hold, then there’s no need to keep looking, because your opportunity cost is the best business currently in your hands. Investing doesn’t require seizing every opportunity—just seizing those few most critical, certain opportunities is enough.
For example, an industry usually has a leader. This leading company has the highest return on equity, the highest profit margin, and the highest market share. Once you understand opportunity cost, you won’t put your money into the second- or third-ranked companies in the industry.
To some extent, thinking more about opportunity cost in investing will push you toward concentrated investing, and that is one of the essences of value investing.
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