May 25, 2022

Buffett's comments on Bitcoin are a lesson for everyone

Buffett's comments on Bitcoin are a lesson for everyone

One of the most under-discussed topics in investing is that the average investor doesn't need to invest in a particular asset.Investors can choose any business they want. There is no obligation to invest in securities just because others are doing it. Moreover, there is never any obligation to hold this security if it does not live up to expectations or something else happens. As individual investors, we can choose what we want to buy and hold and trade what we want.

This is probably the biggest advantageindividual investors to large institutional investors who may have to operate within the limits of investment mandates and support companies they have supported in the past. If they don't, the market could lose confidence in the opportunity and everyone could lose money, even if it means the good money is tossed after the bad.

It's the same with bitcoin.Cryptocurrency can have a place in the portfolios of some investors, but no investor is required to own these assets in a portfolio. Some investors may find it convenient to own them as part of a diversified portfolio. It all comes down to personal risk tolerance and what the individual understands about the asset. After all, you should never own an investment unless you fully understand what it is getting into.

It's a personal preference

Warren Buffett has never been a fanbitcoin because he has only ever really invested in assets that generate cash flow, i.e. productive assets like insurance companies and farmland.

He spoke about this at the Berkshire Hathaway (BRK.A) (BRK.B) 2022 annual meeting of shareholders. In response to a question from shareholders, the Oracle of Omaha said:

If all the people in this room owned everyonefarmland in the United States, and you would offer me a 1% share in it, and you said that out of a 1% share in all the agricultural land in the United States, that's a bargain. $25 billion; I'll write you a check this afternoon. $25 billion and now I own 1% of all farmland… If you told me you own all the bitcoins in the world and offered them to me for $25, I wouldn’t take them because what would I do with them did? I have to sell it to you one way or another... it won't do anything... The farms will produce food.

I don't want to allocate bitcoin. Buffett has also said the same thing in the past about gold and other assets that don't generate cash flow. This is really the crux of the controversy.

If an asset does not generate cash flow, it does not generate income for its investors. Thus, the only way for investors to make a profit is to sell this asset at a higher price.

Investment and speculation

Between investment and speculation there isa fine line. Investment can be defined as the acquisition of a productive asset that generates cash flow, while speculation can be defined as the purchase of an asset with a view to selling it later at a higher price. There are some variations on this definition.

Buffett has clearly defined what he believesan investment in the past, and that's what he sticks to. I believe that other investors can benefit from the same approach. By avoiding things they don't understand and sticking to what they know, you may be able to improve your investment performance in the long run because you won't buy securities you don't understand in the hope of making a profit by selling them at a higher price. the price of someone else.

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