Warren Buffett's Investing Strategy vs Bitcoin: Can Value Investing Beat Cryptocurrency in the Long Run?
Summary:
The article discusses how Warren Buffett's value investing strategy compares to Bitcoin and highlights his substantial cash position. It examines Berkshire Hathaway's investment approach, including their holdings in Apple shares, and questions whether Buffett's strategy can outperform Bitcoin in the long run. The article also explores Buffett's dismissal of non-productive commodities as a store of value, the performance comparison between Berkshire Hathaway stocks and Bitcoin, and the potential implications of Berkshire Hathaway's significant cash position. It concludes by highlighting Bitcoin's potential as a viable alternative store of value.
Warren Buffett, the celebrated investor and chairman of Berkshire Hathaway, marked his 93rd birthday on August 30. Throughout his extensive career, he has remained dedicated to a value investing strategy that shares some similarities with the "buy and hold" approach often associated with cryptocurrencies. However, Buffett's focus lies on assets with strong earnings potential and investments in companies and sectors where he and his team possess a deep understanding of the associated risks, competition, and advantages. The question now arises whether this laser-eyed strategy can outperform Bitcoin in the long run. Furthermore, investors should question why one of the greatest stock pickers of all time currently holds cash and short-term bonds as the second-largest position in his portfolio.
One interesting example that highlights this approach is Berkshire Hathaway's largest holding, Apple shares. Berkshire Hathaway acquired these shares in early 2016 when the company was already valued at over $500 billion, showing that they were not early investors. Interestingly, Berkshire Hathaway continued to add to its investment in Apple in 2022, even though the stock had already rallied more than 500% since their initial purchase. This demonstrates Buffett's commitment to long-term investment strategies, regardless of recent price movements.
Buffet dismisses non-productive commodities as a store of value. In a shareholder letter from February 2012, Berkshire Hathaway expressed concerns about the devaluation of paper currency and discussed the limitations of gold as a store of value. They argued that gold lacks practical utility and that investments in productive companies generate substantial dividends and returns. Unfortunately for Buffett, Bitcoin's price surged by 683% in the 12 months following his critical comments on the viability of non-productive commodities as a store of value. Moreover, over a 4-year period, Bitcoin's gains amounted to a staggering 9,014%.
To compare Berkshire Hathaway's stock performance to Bitcoin, considering Buffett's focus on earnings and yield, we calculated Berkshire Hathaway's stock performance using a factor of 3 to simulate a leveraged position. If an individual had invested $1,000 in Bitcoin and initiated a leveraged long position in Berkshire Hathaway shares in early 2019, they would have observed a return of $7,020 in Bitcoin compared to $5,623 in Buffett's holding company. Similarly, for an investment starting in 2017, it would have resulted in $3,798 in Bitcoin, as opposed to $1,998 using the leveraged long strategy in Berkshire Hathaway's shares.
The apparent inconsistency in Buffett's strategy could be seen as bullish for Bitcoin. It's worth noting that Berkshire Hathaway is currently holding a record-high $147 billion in cash equivalents and short-term investments, representing 18.5% of the company's total market capitalization. This raises questions about whether they are waiting for better entry points into selected stocks or if they consider the 5.25% returns on fixed-income investments to be satisfactory. This scenario highlights that even the most accomplished stock market investor may have reservations about deploying their cash and suggests that some funds currently on the sidelines, including the $5.6 billion in money market funds, might seek alternative forms of protection if inflation makes a resurgence.
Bitcoin may not be a perfect store of value, and its volatility is a concern. However, it's crucial to acknowledge that Bitcoin has yet to face a global economic recession, making it premature to pass definitive judgment. Additionally, the consistent outperformance of Bitcoin's price compared to Berkshire Hathaway's shares indicates that investors are increasingly viewing it as a viable alternative store of value. In light of this, Berkshire Hathaway's significant cash position serves as a potential cautionary note for those skeptical about Bitcoin. With Bitcoin's market capitalization currently standing at $500 billion, it signals significant untapped potential for its role in the financial landscape.
Published At
9/1/2023 5:35:02 PM
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