Warren Buffett: Stay Away From Bitcoin. It's A Mirage
businessinsider.com
businessinsider.com
Several times in the past he's consistently said tech companies such as; "Apple", "Google", and "Facebook" are far to risky of investments. He didn't invest in IBM until 2012.
He also seeks out companies whose stock has a history of producing ongoing income for investors in the form of a regular dividend. Tech companies rarely offer this. Without a dividend, the value an investor derives from the stock hinges solely on its current price. Dividend income diversifies this, providing a return even if the stock remains flat and buffering losses if you need to sell short.
While bitcoin may prevail (and if it doesn't, I'm pretty sure another crypto-currency will) but it needs to stabilize, it currently flucuates way too much. So the advice for investors to stay away from bitcoins, at least currently, doesn't seem unreasonable.
What do you mean by this? I always assumed I don't fully understand Bitcoin because I don't have a crypto background.
And if Buffet is wrong on bitcoin, so what? He's still Warren Fucking Buffet.
Extremely high volume stocks can be unstable. A classic example would be Sirius, which at times when it was a favorite of day traders would swing wildly while moving hundreds of millions of shares per day.
All you need to create instability in a case of high volume, is enough additional volume. Large volume ups the ante on how much additional volume may be needed to cause instability, but doesn't guarantee anything.
That is exactly my position. The underlying technology is very compelling, but Bitcoin's present valuation is nutty.
It's like the web. Pets.com and Flooz were silly, but the web was not.
An obvious argument for any currency system based on a physical media limited by scarcity. Which is "artificially" true of bitcoin, another part of the viability of the system. But you already knew this, however I wanted to explore it on a similar high level idea.
Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond."
I pick the gold.
If not, what is special about gold? Are you confident that wouldn't change if all the gold were held by one individual?
I find it staggering that the calibre of a Warren Buffet can demonstrate so little capacity for sound thinking about value, wealth and wealth assets.
Is the Mona Lisa worthless because it's priceless? What about a Picasso, do you expect it to produce crops or refine oil? When you fondle a French castle, do you expect it to respond?
"I ask you, how can currency price gold? Indeed, no price will work!" ~ Another
"how can paper currency that represents "the thoughts of a nation blowing in the wind" be used to value real money of ancient world class proportions, gold? It cannot! Any price you can think of will do, as in no price will work!" ~ Another
Gold could absorb the worlds derivatives debt tomorrow in value and not a thing would change in the world, except many headaches gone. Gold could be managed at around production costs for many many decades since 71 and not a problem was found with this. Gold's currency price is meaningless, it's utility for "inter-generational" wealth preservation at a "giant scale" is priceless indeed. Because it is so unproductive, representing "great wealth" comes at no cost infringing on the "productive economy". Why hoard rice or industrial-strength silver to represent your wealth across currency regimes, social upheavals and technological fads and whims and political and market ups and down, when there is gold that can represent "much wealth" in very small physical chunks! Come on Warren, you gotta be kidding me. This piece must be intentional disinformation. He must have been walking around much old-world wealth in his life, and here he pretends "gold, I'm not getting it, gimme ExxonMobile shares any day" (or why not Enron if you're so into energy?).
Then again, he prefers giving all his excess wealth to charity instead of doing the old-school "intergenerational family wealth" thing, truly American I suppose, so yeah, makes sense he see's no value in gold. Someone like Warren Buffet must truly believe that the American Dream will never expire, its currency never weaken in the eyes of the world, it's stocks always be cutting edge. At his age and with his life experience, can we fault him for that? Guess not.
Why hoard gold? Inflation-protected treasury bonds can "represent wealth" in an even smaller, more efficient manner.
> Someone like Warren Buffet must truly believe that the American Dream will never expire, its currency never weaken in the eyes of the world, it's stocks always be cutting edge.
As he says, "400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be"
Even if you believe that in the future humans won't need to eat crops, or that climate change will so damage the environment as to render US farmland barren, the general case for owning productive assets over holding unproductive stores of value seems like a good one.
That is, they may well appreciate with or outstrip inflation, but they are not really meant to earn a yield "productively" like crop and ExxonMobile shares do.
They aren't "investments" in the proper, classical "value investor" sense, they are wealth assets in their own right. Even Ben Bernanke knew that much and told the world in the open! But Warren doesn't know gold's usefulness? Give me a break.
Gold isn't an investment in the same way a life preserver isn't a treadmill. Both have their time and place in life.
Non-productive, non-investment wealth assets: they don't stimulate much economic activity, but they also carry much lower counterparty and other risks and don't infringe on "everyone else's productive economic activity" by stockpiling needed resources in gigantic quantity when they could be put to productive economic use by the nation. Gold is so valuable here precisely because it's (economically) "so useless". You can't eat gold? That's precisely the point! Perfect hoarding medium.
If you look back on a lifetime of very savvy investment work, like Warren does, you'll find your investments will have earned you much "excess income" that can be either put back into economically productive investments, or transformed into non-productive, non-counterparty-risk, by-and-large-in-the-long-run-value-preserving wealth assets. Many very wealthy people after a lifetime of earning excess income from economic/investment savvy do choose to "cash in some of their chips", so to speak. And over millenia, if they do so in assets that don't infringe on society's economic activity, everyone is better off and the hive will leave them alone.
Warren may be one of the few who doesn't wish to do so, but he cannot possibly pretend not to know that this is Gold's proper and totally reasonable purpose in today's times.
Other than massive Central Bank stockpiles that is, of course.
The former's value is intrinsically fluid to the point where it's a weakness as well as a strength, however the latter's value is quite distinct. The BTC transaction network is reliably robust, spans the globe irrespective of national boundaries, quite secure, and fast.
Some people call BTC the internet's gold, but that couldn't be further from the truth -- gold just sits there gathering dust. Gold has some industrial applications but at the end of a day it's just a store of value, whereas BTC encompasses the transaction network just as much if not more than acting as a store of value.
Put another way the value of bitcoin is the value of the network. How do you value the network is the big question.
(I don't necessarily think there is strong case for those scenarios, but it's pretty hard to decide at what exchange rate the thing becomes unstable).
It works well enough as an investment strategy, assuming the political landscape affecting the moral view of businesses doesn't change radically, or at least it has worked well for the last ~half century. It also means you end up investing in candy companies, sugar water companies (Coca Cola), sugar tomato sauce companies (Heinz)... (and did they invest in a tobacco company? I don't remember, but Buffet was on record in the 1980's praising the business model of big tobacco, even though he later changed his tune.) Note the externalities and lack of vision: some major BRK investments are in companies that are rather bad for people's health.
Buffet and Munger are very smart. They know their limits, and they are fanatical about avoiding cognitive bias. They're very ethical within the small domain of their business. However, they don't concern themselves with, or dream about, the big picture. They have avoided most tech companies, for good reason, but individual tech companies have flourished (e.g. Microsoft and Oracle, then Apple and Google, and now newer startups). Being too complex to be favored by Buffet and Munger does not necessarily mean you will fail.
Seeing Buffet complain about bitcoin, I have to wonder why he's warning investors about something he doesn't understand (nothing against him; neither do I) rather than focusing on his core competency. The sad answer, I fear, is that Berkshire Hathaway is in the politics business now because their business has gotten too unwieldy (which they're honest about; they openly admitted long ago that returns would decline). Slowing the decline in their rate of return is their business now, and that means playing politics. Bitcoin, whether it's viable or not, could be a threat to the economic establishment. Therefore, it threatens Berkshire Hathaway, and rather than staying silent on the subject like he does about almost everything else he doesn't understand, he makes a public statement against bitcoin.
My understanding of BRK is that it is the business of resource allocation (i.e. "management") for the purposes of investment. (Did I mention the insurance thing?) I suspect that provides enough of an understanding of the situation for Uncle Warren. I don't believe BRK is involved in currency speculation as a primary business either. ("Primary": currency risks are unavoidable. What I doubt is that Buffet regards them as a profit center.)
For most applications for a virtual currency or virtual commodity, only a subset of those are necessary, and for many applications some of them are undesirable, and for many applications there are additional features that would be good to have.
I think the historical role of Bitcoin will be as a proof of concept demonstrating that a whole bunch of feature, some that were thought to be very hard to do in practice, are feasible to design into a system, but that in practice it will be replaced by several different systems each addressing particular classes of application and optimized for those applications.
Bitcoin as a medium of exchange is more interesting, since it in many ways behaves as cash while still being digital. It doesn't have some of the downsides of credit, which is the only other convenient digital medium of exchange.
On the other hand, as it stands, Bitcoin is not a very good medium of exchange, for the precise reasons that many people want to mistake it for an investment. It's too volatile, there is too much speculation; exposing your transactions to that kind of currency risk without really understanding what you're about is insane.
Further, the deflationary behavior of Bitcoin ruins it as a medium of exchange in precisely the same way that feature makes it appealing as an "investment". A Bitcoin that will buy you a cup of coffee today might buy you a yacht next week; as soon as you realize that you have significantly less incentive to spend it on the coffee. Meaning that there is a disincentive to use it as a medium of exchange today and that same incentive will be there tomorrow, too.
So suddenly he's comfortable commenting on Bitcoin? I have a hard time taking his criticism seriously.
Mark Cuban bashed Bitcoin this week too. But Cuban owns Bitcoin and admits he's made money with it. While I disagree with his criticism at least he's making it with a bit of understanding. I think Warren Buffet is finally starting to lose it.
Look at any country with hyperinflation that still collected taxes and you'll see the true worth of the currency. The government's backing of a currency, even through taxes, does not inherently give it value as we've seen before.
[1] http://georgewashington2.blogspot.com/2011/08/average-life-e...
Incidentally "printing money" is not "aka inflation" - it causes inflation if the money supply grows faster than demand for the money but they are different things.
http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hype...
Anyways, insuring against political instability is not a bad idea
So, because A precedes B, we're assuming B causes A?
And having to print Marks to buy that gold, at whatever price was being asked, from people who had no particular need for Marks.
On the whole, he might be right about 50% of the time there, so, about as good as tossing a coin.
He's saying the same thing that Benjamin Graham would have said: Bitcoin isn't an investment, it's a speculation like art. Sure, you could make some money on it (and some have for sure), but don't delude yourself into thinking you're making a sound investment.
Second, he runs a $300B USD financial and industrial conglomerate that he's assembled in a singular way in the span of his own lifetime. Maybe he has insights that are worth something.
Third, Kernighan is over 70. Ritchie would be, too. Knuth is 76.
I mean, I have no illusions about changing your mind, nor do I care. I just don't want anyone who is reading your comment see it go unchallenged.