Our Investment Insight

“A bird in the hand is worth two in the bush.”

To flesh out this principle, we answer only three questions. How certain are we that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate?

There are many times when the most brilliant of investors can’t muster a conviction about the birds to emerge, not even when a very broad range of estimates is employed. This kind of uncertainty frequently occurs when new businesses and rapidly changing industries are under examination. In cases of this sort, any capital commitment must be labeled speculative.

Now, speculation – in which the focus is not on what an asset will produce but rather on what the next fellow will pay for it – is neither illegal nor immoral. But it is not a game in which we wish to play. We bring nothing to the party, so why should we expect to take anything home?

We make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it. Instead, we try to apply Aesop’s 2,600-year-old equation to opportunities in which we have reasonable confidence as to how many birds are in the bush and when they will emerge. Obviously, we can never precisely predict the timing of cash flows in and out of a business or their exact amount. We try, therefore, to keep our estimates conservative and to focus on industries where business surprises are unlikely to wreak havoc on owners.