11. Opportunity cost, concentration, and the angel’s temptation

Part 15 of 19 in The Patient Owner: Charlie Munger’s Ideas, as Rakesh Jhunjhunwala Might Have Taught Them to an Indian Investor← Part 14Part 16 →

This chapter discusses Charlie Munger's principles on opportunity cost and investment concentration, as interpreted by Rakesh Jhunjhunwala. It highlights the importance of making informed investment choices and understanding the true cost of decisions.

Aniruddha. Munger was fierce about opportunity cost. The true cost of a choice is the best alternative you did not take, not zero. You ran a concentrated book. Rare Enterprises was not a zoo of forty equal ideas. Friends of the record say the top holdings carried most of the weight. A young angel hears ‘concentrate’ and hears ‘bet the fund on my favourite founder’.

Rakesh. Then the young angel has heard a slogan and missed the condition. Concentration is the prize for having a circle, an inversion, and a margin. It is not a personality type. I would rather own a few businesses I can explain to my wife without a slide than twenty I explain with a slide. But the few have to be few for a reason. ‘I am a high-conviction person’ is not a reason. It is a temperament. Temperaments need adult supervision.

Aniruddha. The angel’s special temptation is that every meeting feels like Titan in 2003, and none of them will send an annual report for twenty years. The feedback is slower and the storytelling is better. Opportunity cost is brutal in that room, because the cheque you write to a fluent deck is a cheque you cannot write to a duller founder who knows his numbers.

Rakesh. Say it to the partnership in those words. A slot is a scarce asset. Charlie would have asked you not to compare the startup with cash under the mattress. Compare it with the best other thing you are allowed to own — a listed compounder you already understand, a second founder who has customers, even your own time, which is a security you cannot rebalance. People ruin themselves by treating each decision as a yes against nothing.

A working rule for angel investors

He proposed a rule simple enough to survive a late meeting.

You may concentrate only where you can name the moat in one sentence, the death in one sentence, and the incentive in one sentence. If any sentence needs a subordinate clause from the deck, the position is a small position or it is no position. Size is not how you express hope. Size is how you express the length of the fence you have actually walked.

Aniruddha. And for the person who is not a full-time investor?

Rakesh. I said this in public and I will say it here without shame. Unless this is your work, do not pretend you are building a private Rare Enterprises between dinner and the children’s homework. A systematic plan in a broad Indian equity vehicle, held for a decade and more, will beat the version of you that picks four stories a year from a group chat. The teens, over long periods, are a dignified outcome. The fantasy of repeating someone else’s concentrated result, without someone else’s scars and someone else’s hours, is how the impatient fund the patient.

Don’t expect the market to be a gambling venue. For the person who is not doing this all day, a long systematic plan is the grown-up instrument. — Spirit of his public remarks on realistic equity returns; not a promise

Evening question. What did you say no to in order to say yes to the thing you now own? If you cannot name the alternative, you have not met the cost yet. You will.