The 99 Chains Newsletter — Issue #1, Warren Buffet vs. Tim Draper

Jan 23, 2019 · 5 min read
Possibly an unfair battle

Share volume and price spiked in insurer Travelers (TRV) on Friday — not coincidentally, the day the media revealed that Warren Buffett’s Berkshire Hathaway had increased its stake. The famous value investor moves markets, so if Warren Buffet does not like a stock or sector, does it matter?

It’s no secret that Warren is baffled by bitcoin. He does not even consider it an investment.

Should we crypto enthusiasts be worried?

The Oracle of Omaha, one of the most successful billionaire investors of all time, was also nonplussed by technology stocks. He’s a value investor. Value investing is an investment strategy in which stocks are selected that trade for less than their intrinsic values.

Buffet doesn’t invest in new technology companies because they do not meet his value investment criteria. He buys undervalued stocks when they’re at an all time low, and then holds the stock forever.

He first invested in Apple in 2016, not 20 years ago. That’s pretty recent. But now Apple has had decades to prove itself as an established company, and meets his high criteria for investment.

Buffet spends hours each day reading annual stockholder reports. He’s looking at companies with healthy free cash flows, a specific P/E ratio, favorable profit margins, a growing net worth/shareholder value, and a reasonable return on shareholder equity (ROE).

The wealthy value investor invests in products he uses and companies like Coca-Cola and McDonalds that have been around for a long time. This has worked out pretty well for him.

His motto is “just show me the cash-owner earnings.”

Tim Draper is a long-time tech investor, venture capitalist and crypto-bull. He was the first person to attach catchy messages and links when Hotmail first came out. He basically invented viral marketing. Draper was also an early investor in Tesla and SpaceX.

Draper bought 32,000 bitcoins in 2014 for an undisclosed price (the BTC that was seized by the government from the dark web market, Silk Road). It’s estimated that he’s got around half a billion dollars in crypto, but maybe more.

Draper’s bitcoin investment has realized a 25x ROI in just three years. The venture capitalist also put $100m USD in Coinbase, the largest crypto exchange. Coinbase has more active accounts than Charles Schwab does and is valued at $8 billion USD.

“It’s better to be the one encouraging the changing of our own industry than to be the one who gets surprised by it.” — Tim Draper

It’d never happen, simply because Draper and Buffet have very different investment styles dating back to the very start.

The financial tools and valuation frameworks in crypto and publicly listed companies are, at least for now, worlds apart. Startup companies are betting on an idea. They might have a working product and revenue but they’re so new that you can’t use many of the same metrics that Buffet uses to analyze them.

Buffet has probably cringed at the mania in the crypto space, which is the antithesis to his investment philosophy and to be avoided at all costs. He’s not a speculator and he doesn’t trade stocks. He doesn’t drive a Purple Lambo with butterfly doors…the billionaire drives a 2006 Cadillac XTS, a $45,000 car.

Berkshire Hathaway would be verbally destroyed by shareholders if 9 out of 10 companies in its portfolio were performing poorly for more than a few years. Draper, being a VC on the other hand, expects most of his investments to have small gains, and one or two outliers to provide a 10x, 20x, or 100x ROI.

But in some ways, the two investors aren’t so different.

Buffet has famously promised to never sell a share of American Express, Coca-Cola or Wells Fargo. Draper has shown similar bullishness and faith in buying and holding Bitcoin — “it’s the future of commerce.”

Both investors stick to their guns and focus on their area of expertise. But, hey, it’s worked out pretty well for these billionaires.

Buffet hasn’t commented much on blockchain tech, but he has denounced bitcoin as one big bubble. I think he’s kind of been forced to make a statement on it. In interviews he’s admitted that he’s not a tech investor, and it’s not his area of expertise.

Mind you, he’s been wrong before, like when he invested in IBM…

He also didn’t invest in Amazon or Google, which he regrets not doing. Buffett admits, “I was too dumb to realize.”

Who’s right?

While Buffet is certainly one of the greatest investors of all time, he lacks the track record of successful investments in the space, along with the technical expertise.

Simply put, domain expertise is critical. We’re probably better off looking at investors with a track record in tech — like Tim Draper, Naval Ravikant, Marc Andreessen, Peter Thiel and Chris Sacca.

This isn’t to say that Buffet won’t eventually invest in a blockchain-based company. If he decides to make any sort of bet on a tech company in the future, there’s at least some likelihood that the company will have a product or service offering related to crypto (i.e., an investment in Facebook would mean he’s indirectly supporting Whatsapp’s development of a stablecoin).

For now, Buffet’s largely skeptical and negative comments on bitcoin say little about crypto or the blockchain industry as a whole. There are people more qualified than him to make that call, and smart people have certainly been wrong about the future!

Thanks for reading, and see you next week!

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