Warren Buffett once famously said that he will only invest in industries that he understood. The famed investor has, until recently, avoided investing in Silicon Valley firms (friendship with Bill Gates and Mark Zuckerberg not withstanding). After all, we’re talking about a man who likes playing bridge and buying newspaper companies.
So when the Oracle of Omaha states an opinion on technology, we should understand not just his viewpoint but the lens through which he sees them.
During Berkshire Hathaway’s annual meeting over this past weekend, Buffett reiterated his derision of Bitcoin and digital currencies. Only he used more colorful language.
“It’s probably rat poison squared,” Buffett said.
Trading cryptocurrencies is just “pure dementia,” Charlie Munger, Buffett’s right hand man, said.
First of all, Buffett and Munger weren’t just randomly opining about Bitcoin. They were answering questions from shareholders and journalists. Which begs a crucial question: why are you asking Buffett about digital currencies in the first place?
Buffett has built his entire career on the concept of “value investing,” which emphasizes buying undervalued but stable assets and holding them for the long term. It’s the reason why he likes things like railroads, soda, and banks and not technology unicorns.
As new technology, Bitcoin and other cryptocurrencies are by nature volatile and speculative. So of course, Buffett is not going to think well of Bitcoin because the asset is inherently incompatible with his investment philosophy. Asking Buffett about Bitcoin is like asking a vegetarian if he or she likes red meat.
In other words, Buffett is very good at a particular kind of investing that’s conservative by nature. By contrast, Bitcoin might be right for someone willing to tolerate some risk in his portfolio.
Of course, putting all of your money into one asset is probably not a good idea, whether Bitcoin, gold, or real estate. What bothers me most about Buffett’s comments is that he seems to say digital currencies are without qualification a bad investment in any amount or scenario.
We should always treat such sweeping statements with a little skepticism. For one thing, ignoring Bitcoin means that you should also ignore Blockchain, which some believe to be the most disruptive technology since the advent of the Internet.
Buffett says digital currencies carry no intrinsic value. But he’s only looking at the currency in isolation. Using Blockchain, the technology that allows investors to move cryptocurrencies around the world, companies are now raising capital by issuing investors digital security tokens, bits of code that represents units of ownership the same way a stock certificate signifies equity.
The emergence of cryptocurrencies and blockchain tokens promises to fundamentally remake the private capital market. In 2017, the total value of tokens grew to $37.7 billion, a nearly 19,000 percent increase over the prior year. Companies and investors raised $5.4 billion last year through initial coin offerings. At its current rate, ICO capital raises will hit $12 billion this year. To appreciate the rapid growth of token sales, consider that U.S. startups 2017 raised an estimated $8 billion using traditional private placement.
And let’s face it. Buffett’s record on technology is mixed at best.
Take his large and bullish bet on Apple.
Apple is by any measure a highly successful company. But why did Buffett choose to only recently buy a stake in Apple instead of purchasing shares when Steve Jobs ran the company and successfully launched the iPod and iPhone? The stock was much cheaper back then. Today, it’s not clear what will drive Apple growth beyond its iPhone sales, which are slowing.
He also admits it was a mistake not to invest in Google or Amazon.
“I made the wrong decisions on Google and Amazon,” Buffett said the annual meeting. “We've looked at it. I made the mistake in not being able to come to a conclusion where I really felt that at the present prices that the prospects were far better than the prices indicated.”
More specifically, Buffett didn’t think Amazon could scale as fast it did. Perhaps he only saw Amazon as an online seller of books instead of underlying platform technology that could rapidly expand into industries beyond retail. He seems to similarly focus on cryptocurrencies as merely an overpriced asset instead of recognizing the overall potential of the technology.
I’m not saying Buffett should endorse cryptocurrencies. But dismissing them out of hand is not wise either. Buffett’s opinions carry weight, regardless if he is qualified or not to offer them.
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