Birds, Bushes and Beshores

December 12, 2018

Everyone knows the expression “a bird in the hand is worth two in the bush.” The fancy name for why the bird in hand is more valuable is an economic concept called “opportunity cost.” Opportunity costs are measurements of how worth the effort the opportunity is (cost = effort, opportunity = two birds > one bird). 

Businesses and individuals regularly make decisions based on perceived opportunity costs. As one might imagine we aren’t very good at this, but that’s why behavioral economists love to study it so much. Imagine someone gives you a free pair of concert tickets worth $25 for a show you’d love to see, BUT you just bought movie tickets for the same night and spent $30. Neither are transferable to another date. What do you do?

We’d start by weighing the “costs” both mentally and financially. “This is my favorite singer, but I really wanted to see that movie… and we’ll lose $5!” Eventually, we’d figured out which one to attend. There’s a lot of math and rational/irrational debate that usually comes next for the behavioral economists, but today we’re just focused on the basics. We all have to figure out if we sit tight with what we’ve got or we stretch for something else. As should be no surprise, our default setting isn’t purely rational.  

For any professional, knowing our hurdle for when to sit vs. stretch becomes essential to figuring out what we should and shouldn’t focus our attention on. InvestorBrent Beshore builds portfolios of businesses where he and his partners intend to be permanent owners. There’s no flipping going on here – they invest for the long, long, long haul. Beshore says that his objective is to have an impossibly high opportunity cost. Take a moment and think about that. He figures if the bird in his hand is really, really good, then the two in the bush will have to be somewhere between outstanding and amazing to get him to stretch. 

While striving for an impossibly high opportunity cost may sound intimidating, we should think about what this produces. Internally, they focus on developing their own businesses to be so strong that they’ll be very happy just to sit on them for decades. Externally, they are focused on such exceptional businesses that they’re much more likely to pass on average or lesser opportunities as they present themselves. Their bet is that over time, by maximizing the lifetime value of the bird in hand, they’ll be afforded a much more critical eye on which birds in the bushes they’ll ever need to stretch for.

By understanding our own opportunity costs, we force ourselves to dig into the nuances of our own clients and practices. We have to get creative. As we think about our own ambitions and goals, Beshore’s perspective serves as a healthy reminder to not just assume the bird in our hand is worth two in the bush. It may very well be worth seven average birds or barely one incredibly special bird. When we approach our own businesses with a more permanent mindset, we’ll have a greater appreciation for developing the birds we’ve got first, and how to keep a critical eye open for opportunities worth stretching for in the bushes.