Why Warren Buffett’s Philosophy Is Incompatible With Bitcoin
By Breno Brito on ALTCOIN MAGAZINE
Recently, Warren Buffett has made an even more aggressive attack on the Bitcoin, causing an uprising in the community. According to the CEO of Berkshire Hathaway, Bitcoin is “probably square mouse poison”. He concluded that Bitcoin is not an investment and that cryptocurrencies will almost certainly end badly. Years before, he had already said,
“It’s basically a mirage.”
How can the third richest man in the world, one of the world’s top investment specialists can say something like that?
“Our favorite period to hold is always.”
Born a year after the great recession, Warren Edward Buffett was hired at age 24 by Benjamin Graham, from whom he learned much of what he uses today. This wisdom is now gathered in Graham’s The Intelligent Investor.
Graham and, consequently, Buffett do not believe in the possibility of efficient market forecasting, do not believe in trades or technical analysis. The investment strategy, after all, is very simple and has been translated into this allegory created by Graham:
Imagine that you are one of the owners of a company and Mr. Market is your partner. However, Mr. Market is manic-depressive and often offers to sell his shares to you or buy yours. So, as Mr. Market’s mood ranges from extremely pessimistic to incredibly optimistic, the prices he offers you to buy or sell vary accordingly. The reader can always reject the proposal since soon it will make a new one, completely different.
“Price is what you pay, value is what you get.”
According to Graham, a rational person will buy when the price is low and sell when the price is high, not because the price has gone down or gone up. That is, the important thing is to know the value of your company, which can be calculated through fundamental analysis.
The cornerstone of Graham and Buffett’s investment philosophy is the idea that the value which brings return over your investment comes from work. Whether you invest in a bond or stock, the company will have to work to pay you interest or dividend.
This is completely different from what happens with gold, commodity, currencies or cryptocurrencies. Neither gold nor bitcoin will pay you dividends or interest. Your only hope is that a person will buy it for a higher price from you. It’s not a company with people working for you.
“Never invest in a business you do not understand.”
Looking at Berkshire Hathaway’s historical portfolio, you’ll see that well over half of the investments are always big well-known companies. Looking closely, one realizes that all companies work with tangible or financial products. Coca-Cola, Walmart, Gillette, Wells Fargo, American Express, Tesco … The only technology-focused companies are International Business Machines Corp., the famous IBM, which entered its portfolio in 2011, one hundred years after its founding, and Apple, which entered in 2016. Earlier this month, the Oracle of Omaha sold what it had from IBM to buy more Apple.
So it goes without saying that not only Bitcoin goes against Buffett’s investment philosophy, but he also does not invest nor recommend it for not understanding, just as he did not understand the business model of Google and Amazon years ago. According to Buffett, failing to understand the business model of technology companies pushed him away from them. After all, a check is no more valuable than cash just because it is another form of transmitting money, as stated in 2014.
Beyond this, there is this clear conflict of interest, since he is an avid investor of large banks and other financial and payment companies. Who would like to see your bank lose money for a currency that has no company behind to invest?
“Diversification is the protection from ignorance. It makes very little sense to those who know what they are doing.”
In summary, we cannot blame Buffett. Even for a dedicated person today, it is difficult to learn and follow the more than 1500 existing cryptocurrencies, imagine for a rich 90-year-old man with a successful investment philosophy. His focus is on companies, not on currencies or commodities; it is on tangible products, not technology.
“But I know this: If I could buy a five year put on every one of the cryptocurrencies, I’d be glad to do it but I would never short a dime’s worth.”
Unlike Bill Gates, who said he would short Bitcoin “if there was an easy way to do it” (not knowing that there are ways to do it), Buffett made it clear that he would never short a cryptocurrency despite not believing in its growth.
Buffett may not understand the Bitcoin business model, he may not understand the underlying technology, but he understands enough risk management to know that if you short trade in a market that can have unexpected monumental highs even he could go bankrupt.
All quotes are from Buffett.
