If Bitcoin was as wonderful as its avid followers claim, 2020 is surely the year it would have come good. Perhaps even Warren Buffett would have sat up and taken notice. To be fair, over the past 12 months, it has gained a little, to reach $11,400. But that does include a big crash in the early Covid-19 days, dropping below $5,000, followed by a rebound.
The big pandemic drop suggests Bitcoin isn’t much of a hedge against stock market falls. Not if it’s going to crash along with them, with even greater volatility. If you look at gold, by contrast, there was still a bit of a lag with a modest price dip to start. But since then, the shiny stuff has been soaring. Earlier in August, it peaked at an all-time high of over $2,000 per ounce. That’s more like the behaviour of a genuine hedge investment.
What does Buffett think about investing in currencies generally, and Bitcoin specifically? Well, at the 2018 Berkshire Hathaway annual shareholder meeting, he famously described Bitcoin as “probably rat poison squared.” But what about investing in currencies generally, even real ones?
Buffett offered some interesting thoughts in his 2011 annual letter to shareholders. Before I get to it, can you tell I’m a fan of Buffett’s letters and speeches? I’ve been coming back to them time and time again during my investing career. I reckon they’re among the best sources of investing wisdom out there, and I strongly recommend just picking one at random every now and then and having a read.
No Bitcoin yet
Anyway, in 2011 Bitcoin wasn’t around. But Buffett did write of investing in currency-denominated instruments, like bank deposits, money-market funds, bonds, etc. He wrote: “Most of these currency-based investments are thought of as ‘safe’. In truth, they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.”
Between 1965, when Buffett took over management of Berkshire, and 2011, the US dollar lost 86% of its value. That’s what inflation does to currencies. Investing in bonds and the like will pay interest, and that’s where investors hope to earn some income. But what about the 46-year period in question?
Buffett worked out that the average US taxpayer investing in bonds would have made a real profit of… nothing. What profit will Bitcoin generate in 46 years? I expect it will have crashed and disappeared long before then.
Shares over currency every time
We know that Buffett puts his investment in shares, in the common stock of companies that make things that people want to buy. Comparing investing in businesses to investing in currencies, Buffett was in his usual sparkling form: “Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper (as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola.“
This was all back in 2011, the previous time gold hit an all-time peak. And I see the same lessons needed today, now folks are again looking for alternative safety investments. As always, for me, it’s shares for the long term. Not gold, not real currencies. And certainly not pretend currencies like Bitcoin.
The post Forget Bitcoin! I’d rather make a million by following Warren Buffett’s strategy appeared first on The Motley Fool UK.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020