As Expected Crypto Scams are Multiplying

[Edwin Santos]

I think Buffet's comment has always been more about understanding to the point of having an edge over other investors.

Based on what I read in The Snowball, and other writings about Buffett's investing methodology, his formula is as simple as it is ingenious. Basically he performs a balance sheet analysis using some conventional and some proprietary methods. The result is a modified book value of the company in question. If that book value is less than the market cap at the present stock price, it is a buying opportunity in his eyes. He is betting that eventually the market will recognize the book value that he has identified. He has mostly been right, but it has sometimes taken a long time. There are other factors that he considers too.

So hearing this, you can see why any tech or emerging technology company will never pass muster under Buffett's method. A balance sheet is always going to be a historical, backward looking measure. This is why you can look at the Berkshire portfolio and see that it is mainly comprised of very mature companies that have an established book value. It is also why you won't see young, emerging companies, and definitely not a non-productive speculative asset like crypto.

This is not to criticize Buffett, just to say his investing methodology is more narrowly limited that many people realize. If you happen to like tech or emerging companies, then he's not your man.
If you ask me the part that makes Buffett special among investors is his remarkable discipline.

[Andrew More]

So hearing this, you can see why any tech or emerging technology company will never pass muster under Buffett's method. A balance sheet is always going to be a historical, backward looking measure. This is why you can look at the Berkshire portfolio and see that it is mainly comprised of very mature companies that have an established book value. It is also why you won't see young, emerging companies, and definitely not a non-productive speculative asset like crypto.

Well... that's the official story anyway. The truth is more complicated as it often is in these matters. He has engaged in buying "non-productive assets" when he bought silver. I suspect if he knew a way to value BTC, and thought he had an edge, he'd buy it. I don't entirely agree with people who want to proclaim that crypto has _no_ value, though I'll be darned if I could say what it is exactly.

He (or his team) also bought Snowflake, which is an emerging cloud company at it's IPO. In that case I'd guess the edge was being able to purchase before the IPO. There also a lot of speculation this was one of his team, though he supposedly okays all deals.

The other criteria you're missing, which forces him into mature companies is that it's just not possible for Berkshire to do well buying anything buy small companies. All stock prices are set on the margin, so any moves to acquire a piece large enough to make it worth Buffet's time is going to skew the price so heavily as to destroy any margin of safety. This is unfortunate, since it's likely that as you said a lot of promising companies are likely smaller cap companies potentially in emerging fields.

Also define "tech" or "technology" I'd argue that some of the current "tech" companies really aren't or weren't. Amazon is a good example, they're got issues, mostly with size, but doing Sears Roebuck and company over the web is hardly innovative. Facebook is similar to Amazon, they're a BBS or a message board on the internet. They've also got some issues with scale, but otherwise it's not a really amazing company, and honestly their product has often been lamblasted in tech circles for it's poor implementation.

Apple is in a similar boat, having always taken what others did, and just add some style to it. They're the Gucci of "tech" companies. And before any of the Apple fans get upset, if Apple is a "tech" company, why isn't Precision Castparts, or BNSF, or GEICO? They're all "innovating" at the same rate as Apple, maybe not as flashy, but still.

OTOH, there's IBM, which has been around for forever, as well as Oracle and Buffet could have probably bought either one, but didn't.

[mike stenson]

Well... that's the official story anyway. The truth is more complicated as it often is in these matters. He has engaged in buying "non-productive assets" when he bought silver. I suspect if he knew a way to value BTC, and thought he had an edge, he'd buy it. I don't entirely agree with people who want to proclaim that crypto has _no_ value, though I'll be darned if I could say what it is exactly.

He (or his team) also bought Snowflake, which is an emerging cloud company at it's IPO. In that case I'd guess the edge was being able to purchase before the IPO. There also a lot of speculation this was one of his team, though he supposedly okays all deals.

The other criteria you're missing, which forces him into mature companies is that it's just not possible for Berkshire to do well buying anything buy small companies. All stock prices are set on the margin, so any moves to acquire a piece large enough to make it worth Buffet's time is going to skew the price so heavily as to destroy any margin of safety. This is unfortunate, since it's likely that as you said a lot of promising companies are likely smaller cap companies potentially in emerging fields.

Also define "tech" or "technology" I'd argue that some of the current "tech" companies really aren't or weren't. Amazon is a good example, they're got issues, mostly with size, but doing Sears Roebuck and company over the web is hardly innovative. Facebook is similar to Amazon, they're a BBS or a message board on the internet. They've also got some issues with scale, but otherwise it's not a really amazing company, and honestly their product has often been lamblasted in tech circles for it's poor implementation.

Apple is in a similar boat, having always taken what others did, and just add some style to it. They're the Gucci of "tech" companies. And before any of the Apple fans get upset, if Apple is a "tech" company, why isn't Precision Castparts, or BNSF, or GEICO? They're all "innovating" at the same rate as Apple, maybe not as flashy, but still.

OTOH, there's IBM, which has been around for forever, as well as Oracle and Buffet could have probably bought either one, but didn't.

I think you're not paying attention to a lot of what Amazon, Apple, etc are actually doing.

[Andrew More]

I think you're not paying attention to a lot of what Amazon, Apple, etc are actually doing.

Oh I am, I'm just not impressed with either company. I've got recruiters calling day and night from Amazon, which tells me they're bleeding engineers, probably because of the crappy working conditions and lack of interesting projects. Amazon's cloud is interesting, but hardly as bleeding edge as you might think. Like I said, both Amazon and Facebook (and Netflix) have interesting challenges dealing with things at scale, but going big isn't necessarily interesting, depending on how the problem has been solved. In Netflix's case they created the idea of microservices, for Amazon? It's hard to say if it was them or Google that started the cloud, which is more marketing that anything.

[Andrew More]

Interestingly enough it appears that Berkshire-Hathaway has just purchased 11% of HP. Not sure if HP is considered a tech company or not, but they were at one point, like a lot of other companies.

[Edwin Santos]

Interestingly enough it appears that Berkshire-Hathaway has just purchased 11% of HP. Not sure if HP is considered a tech company or not, but they were at one point, like a lot of other companies.

HP is absolutely a tech company IMO. Talk about maturity, it was founded in 1939. So despite being a tech company, balance sheet analysis would be a more reliable valuation metric than it would be for a young company. It was only when Apple reached a certain level of scale and maturity that it qualified for Buffett's criteria. As you say, he is also limited to the largest companies for the most part because of Berkshire's size.

[Jim Koepke]

One problem with crypto is it does not exist so if it gets stolen the cops do not care. One account got robbed by a frauduelnt transaction. Rather then let him lose the money the bank took money from everyones account to repay him some of the loss. Like if your safe deposit box got robbed the bank will take some from each box to repay you wouldn't they?
Bill D.

This sounds like tales from the world of fantasy. The FDIC insures depositors in the case of a bank failing. Safe deposit boxes only have the safety of being inside of a vault.

Just one person's opinion here, but I think of crypto less like a stock, and more like a traded speculative commodity. Like gold, precious metals, collectibles, beanie babies.

Yes, gold, collectibles and beanie babies can be traded on open markets. Many commodities can be traded on paper and electronic media. Precious metals can also be held in one's home or buried in the back yard. If everything comes tumbling down, if one has physical possession of a commodity they still have whatever comfort that may allow be it gold, baseball cards or a room full of beanie babies to keep them warm on a cold night.

My original post wasn't intended so much as to frame cryptocurrencies as a scam as it was to point out that people investing in cryptocurrencies are falling victim to scams draining their cryptocurrency accounts.

Yes, Warren Buffet could have multiplied his fortunes greatly by taking positions in investments with which he was uncomfortable. He still somehow managed to make more money than most of us will ever have by staying in his own comfort zone.

Apple has been a great investment. Though it almost went bust back in the early 1990s.

Buffet has made a lot of money off of buying established businesses from owners who wanted to get out of running thriving business. In many cases he kept the previous owners on as managers for a time.

After all, who doesn't like See's Candies? Berkshire Hathaway bought them back in 1972.

jtk