The Charlie Munger Guide To Opportunity Cost
The Charlie Munger Guide To Opportunity Cost
Opportunity cost is one of Charlie Munger's favorite decision-making tools for investing and life. Learn how to use it.
Opportunity cost is one of the most important concepts for investors to understand. This content is intended to give you a usable understanding of opportunity cost so you can make better decisions with your time and resources.
Charlie Munger’s wisdom about opportunity cost
We compiled the ‘best of’ Charlie Munger’s quotes about opportunity cost. All quotes come from the Berkshire Hathaway annual shareholder meetings.
Opportunity cost is a filter for investing decision-making.
“I would argue that one filter that’s useful in investing is the simple idea of opportunity cost.”
—Charlie Munger (1994)“Most people aren’t going to find thousands of [investments] 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 [think] about your best opportunity cost.”
—Charlie Munger (2006)
Charlie uses marriage to illustrate the concept.
“I think life is a whole series of opportunity costs. You know, you got to marry the best person who is convenient to find who will have you.”
—Charlie Munger (1994)“Opportunity cost is a huge filter in life. If you’ve got two suitors who are really eager to have you, and one is way the hell better than the other, you do not have to spend much time with the other. And that’s the way we filter stock buying opportunities.”
—Charlie Munger (1994)
Use opportunity cost to make rational decisions
“And this is a very interesting thing that’s happened. If you take the most powerful freshman text in economics, which is by [Greg] Mankiw of Harvard, and he says on practically the first page that “intelligent people make their decisions based on opportunity cost.”
—Charlie Munger (2003)”But in the real world, your opportunity costs are what you want to make your decisions based on.”
—Charlie Munger (2007)“And we tend to make all of our financial decisions based on our opportunity costs, just as like they teach in freshman economics.”
—Charlie Munger (2003)“And 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.”
—Charlie Munger (2006)“…we’re going to make different deals at different times based on different opportunity costs. There’s no other rational way to make deals.”
—Charlie Munger (2011)
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Bonus Content about Opportunity Cost
Opportunity Cost Tool that you may have seen if you follow @charliemungerquotes on Instagram.
Opportunity Cost Definitions from around the web, curated by yours truly.
Oxford University Press: “…the loss of potential gain from other alternatives when one particular alternative is chosen over the others.”
Investopedia: “Opportunity cost is the forgone benefit that would have been derived by an option not chosen. To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the others. Considering the value of opportunity costs can guide individuals and organizations to more profitable decision-making.”
Lumen Learning: “A fundamental principle of economics is that every choice has an opportunity cost. If you sleep through your economics class (not recommended, by the way), the opportunity cost is the learning you miss. If you spend your income on video games, you cannot spend it on movies. If you choose to marry one person, you give up the opportunity to marry anyone else.”
YouTube Video of Warren and Charlie talking about opportunity cost. Fair warning, this is super boring, but I would be remiss to not include it.