There’s a mindset of swinging for the fences that exists when people are lacking in their life financially.
The ironic thing about taking big risks where the downside is losing everything is that it is rarely wealth-producing. In fact, it can create a lot of setbacks and emotional distress. The very wealthy actually took a lot less risk than many think. They think in terms of asymmetric risk versus reward.
The opposite mindset of risking it all for gains is one of just totally giving up and not trying or attempting to grow. There is a middle ground between risking it all and doing nothing. That is the investing mindset of swinging for singles and doubles. There is a middle ground of methodically measuring and making pragmatic investment decisions.
There’s an old saying that shares this concept. It’s the story of Aesop’s Fable.
Warren Buffett had this to say about Aesop’s Fable:
“The formula for value investing was handed down from 600 B.C. by a guy named Aesop. A bird in the hand is worth two in the bush. Investing is about laying out a bird now to get two or more out of the bush. The keys are to only look at the bushes you like and identify how long it will take to get them out.”
Another idea from Warren Buffett on this Fable:
“Leaving aside tax factors, the formula we use for evaluating stocks and businesses is identical. Indeed, the formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by a very smart man in about 600 B.C. (though he wasn’t smart enough to know it was 600 B.C.).
“The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was ‘a bird in the hand is worth two in the bush.’ To flesh out this principle, you must answer only 3 questions.”
1. How certain are you that there are indeed birds in the bush?
Is the investment one we understand, is it within our circle of competence, does the business possess a moat that is enduring?
2. When will they emerge and how many will there be?
What is the total amount of cash flow (owner’s earnings) the business will produce from now until judgment day and when is the cash flow expected to be received?
3. What is the risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)?
“If you can answer these three questions, you will know the maximum value of the bush and the maximum number of the birds you now possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.
“Aesop’s investment axiom, thus expanded and converted into dollars, is immutable. It applies to outlays for real estate, farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. And neither the advent of the steam engine, the harnessing of electricity nor the creation of the automobile changed the formula one iota — nor will the Internet. Just insert the correct numbers, and you can rank the attractiveness of all possible uses of capital throughout the universe.
“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, immoral nor un-American. But it is not a game in which Charlie and I wish to play. We bring nothing to the party, so why should we expect to take anything home?
“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”
As you can see from Buffett, there is so much wisdom buried within the quote “A bird in the hand is worth two in the bush.” Think in terms of the money that you outlay, how long, at what quantities, and at what timeframe to get your investment and more back. Thinking in terms of cash flow for that return rather than what a speculator will pay for what you purchased is an enduring philosophy. This philosophy, as Buffett says, drives all of his investment decisions.