Billionaire investor Warren Buffett is the champion of bitcoin and gold critics. The so-called Oracle of Omaha has made a habit of bashing the two assets. But behind the childish insults, Buffett’s disdain rests on seriously shaky foundations.
And if the investment mogul had overcome his aversion to the assets over the last twenty years, his investment portfolio Berkshire Hathaway could have supercharged its performance.
Warren Buffett on Bitcoin
“Probably rat poison squared”Warren Buffett on Bitcoin, 2018
On hearing Bitcoin had reached the princely sum of $8,000, Warren Buffett was not pleased and branded the cryptocurrency “rat poison squared.”
But aside from the vitriol, Buffett has made some measured remarks about Bitcoin.
On its potential as a currency, Buffett told CNBC in 2014 that Bitcoin “does not meet the test of a currency.” and that he “would not be surprised if it’s not around in 10 or 20 years.” In Buffett’s eyes, the cryptocurrency is purely speculative— a “mirage”, or “tulip bulbs”— a gambling device to be bought or sold on based purely on a whim.
For those who think of bitcoin as ‘digital gold‘, Buffett has given the backhanded compliment of calling it a sort of “worthless, artificial gold.”
But even if bitcoin did qualify as digital gold in Buffett’s eyes, he would still be likely to consider it worthless…
Warren Buffett on Gold
“[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”Warren Buffett on gold, 1998
In his speeches and letters to Berkshire Hathaway shareholders, Buffett has waxed lyrical on why gold just doesn’t glitter for him.
As a lump of metal, gold doesn’t generate cash flow or yield dividends, and is priced purely by market forces of supply and demand.
In the words of Buffett himself, gold “doesn’t do anything but sit there and look at you.” Thus the rise in value of such an asset, says Buffett, must be little more than a speculative bubble, like tulip bulbs or trading cards.
To Buffett’s value investing theory which sees investments as cows that must produce, this lack of production value makes gold like kryptonite — a yellow metal that has a mysterious weakening effect on his otherwise sound investment strategy.
Silver, however, doesn’t repulse Buffett like its bigger brother. He considers the second precious metal to be more useful because of its industrial applications, and made a massive 3700 metric tonne silver trade back in 1997.
So Buffet’s disdain for gold doesn’t extend to all precious metals. Instead, it can be traced back to the specific philosophy behind bitcoin and gold as forms of sound money…
Why Warren Buffet is Wrong about Bitcoin and Gold
Gold defender Peter Schiff suggests Buffett’s distaste for sound money stems from an emotional rift with his father.
An emotional objection
Howard Buffett was a stockbroker-turned-congressman with strong libertarian leanings. He supported the gold standard because he believed it would limit the ability of the government to inflate the money supply, and argued that “paper money systems have always wound up with collapse and economic chaos.”
So Buffet’s aversion to gold and bitcoin might stem from difficulty relating to his father, who is said to have uprooted the reluctant young Warren from his Nebraska home to move to Washington DC.
Reluctance to diversify
Aside from an emotional barrier, Buffett’s rejection of bitcoin and gold fits with his portfolio allocation philosophy.
Under the tutelage of his mentor Benjamin Graham, Buffett learnt to buy a few select stocks at a price below their intrinsic value; then hold them until their price reflects the real value.
Instead of diversifying to guard against possible bad choices, Buffet prefers to fully commit to stocks that he has deeply scrutinised: “Diversification is protection against ignorance” said Buffet famously. “It makes very little sense for those who know what they’re doing.”.
This kind of thinking leaves no place for gold, which most asset managers recommend should be held as an insurance policy against systemic crises. And bitcoin, which more progressive portfolio managers also suggest should be held purely because it is completely unrelated to other assets.
Lack of understanding
The guiding principle behind Buffett’s success—that has led him to buy shares in companies like Coca Cola and McDonalds—Is that you should invest in things you know and believe in, and hold for the long term.
“We will not go into businesses where technology which is way over my head is crucial to the investment decision. I know about as much about semi-conductors or integrated circuits as I do of the mating habits of the chrzaszcz.”Buffett in a letter to Berkshire shareholders.
Self-proclaimed Luddite Buffett claims not to have a computer in his home office, and eschews investments in companies whose businesses he doesn’t understand.
Buffett was once badly burnt by a misplaced bet on tech giant IBM, which led him to ditch Oracle shares in 2018 — both firms with complex offerings that are arguably less mind-boggling than Bitcoin.
But if Buffett had made the effort to understand bitcoin (and Oracle which went on to make new highs) then he might have been able to boost Berkshire Hathaway’s performance…
Bitcoin and Gold Outperform Berkshire Hathaway
Over the past 20 years, bitcoin and gold have both left Berkshire Hathaway in the dust.
From January 2000 to January 2020, the S&P 500 returned 130% and the stock price of Berkshire Hathaway delivered a magnificent 469% return to investors over the same period.
But, the price of gold managed to keep pace with Berkshire Hathaway, increasing 462% in value over the twenty year period, without all the effort of picking stocks.
An investor buying $1000 of bitcoin however—even in 2011, several years after inception—would enjoy a total increase of +2,494,941%, turning an initial stake of $1000 into almost $25 million.