moneyFYI
Financial Freedom Is Merely Organized Common Sense
Warren Buffett and Crypto
Around Mid-day on the 9th of May, A Yahoo Finance article appeared in which noted venture capitalist Reid Hoffman pointed out that Warren Buffett and Charlie Munger don’t understand crypto. I think he is right, and I doubt Buffett and Munger care.
One of the tents of successful investment is understanding the edges of your circle of competence.
Munger and Buffett claim to have a three-slot system for addressing possible acquisitions. Yes, No, and Too Hard. There is no doubt that crypto is in the too hard slot – outside their circle of competence.
There are many forms of investment.
Berkshire Hathaway invests in operating businesses they can buy at a reasonable price. One of the key elements they look for in an acquisition is the “competitive moat.” Their companies are challenging to compete with because they have significant advantages.
The moat usually involves all or at least most of:
- Capital leadership. – Their companies always have enough money to grow if they see an opportunity.
- Cost leadership. – They are frequently the most efficient in their industry.
- Market share – In some, they are the market leader. In others, they have a valuable niche in a bigger market.
- There are barriers to entering the industry. They do not deal in businesses that can be created easily.
- They are patient – They can wait for a better deal and withstand market turbulence.
They buy a moat and then look for ways to widen it and add some alligators. I think they put crypto into the Too Hard slot when they decided there was no possible way to create a “competitive moat.”
Venture capital investing is not like Berkshire.
Reid Hoffman is likely correct, but that is the nature of investing. No investment is equally attractive to every investor. Hoffman and many others are primarily interested in growth stocks they can sell at high markups. Berkshire is interested in continually growing income from their businesses. Their ideal holding period is forever.
Bonds
Owning bonds and other fixed-income securities is as far from the Berkshire approach as you can get. None of the variables that create value their way are even similar.
Real Estate
Real estate doesn’t have the moat, and development is bureaucracy bound. It is hard to predict, and they don’t need the aggravation.
The Moral of the Story
Berkshire-Hathaway has noticed that you don’t have to own everything with potential. They look for dominating business with good cash flow and simple management problems. If you find yourself drawn to stocks with other characteristics, you may have lost track of the point that stocks are just a tiny sliver of a business.
Crypto has potential, but it is not a business yet. When it becomes a business, you may find Berkshire at the table.
If you cannot describe your temperament and circle of competence, you may end up with investments that don’t serve you well.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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