On the face of it, Warren Buffett seems like the last person to look up to for investment advice in the 21st century.
Despite making multiple fortunes in stocks, he is, in some respects, a dinosaur.
A very rich and intelligent dinosaur, but a dinosaur nonetheless.
Consider that he made some of his first fortunes in delivering papers, producing maps and selling textiles, all industries that have either completely transformed, or else virtually vanished.
While we’re sure Buffett has stayed far away from cryptocurrency investing, there’s still a lot to learn from the Wizard of Omaha.
Today we’ll look at some of the principles that Buffett uses to determine if an investment is worth his time, and how those relate to cryptocurrency investing:
The main principle of Buffett’s strategy has been called “value investing” after Benjamin Graham, Columbia University professor and Buffett’s investing mentor.
Value investing’s core idea is simple: buy stocks at less than their intrinsic value.
In other words:
“Price is what you pay. Value is what you get”
So what is the intrinsic value of an investment? Well that’s what you believe the true value of that investment is. And there’s no simple rule to figure it out.
One tool that Buffett uses is called Return on Equity, (or ROE). Put simply, it’s the net income as a percentage of shareholder equity, or:
Return on Equity = Net Income / Shareholder's Equity
This basically shows how much profit each dollar of common stockholders’ equity generates. An older company often has ROE of 10–20%, calculated annually, while a newer company may have a lower, or even negative ROE due to reinvesting profits in growth.
Unfortunately, this isn’t something you can calculate in a cryptocurrency, because often there are no ‘income’ to speak of and no ‘shares’ owned when you purchase a token. Instead, the value of a token is almost always in the network they provide access to. But the value of a network is difficult to gauge in a dollars-and-cents way. Instead, we need to look at other qualities.
That’s lucky for us, because Buffett doesn’t rely purely on numbers, he also pays attention to the people running the show.
Check the Management
When evaluating companies to invest in Buffett has a few questions he asks himself about the team in charge:
Are they honest?
A certain amount of psychopathy is expected in business but Buffett looks for management to ‘admit to their mistakes’ a rare quality in young teams. Owning up in public when accidents happen can actually give investors greater confidence in the company over time.
And particularly in cryptocurrency investing, where scams are prevalent, knowing the team in charge is essential.
Key points to look for:
- Can you find them on LinkedIn, or are they an anonymous team?
- What history does the management have?
- Do they have a strong technical background, or contacts in industries that would benefit from tokenized assets?
Are they rational?
Does the team make decisions that make sense for the company, or that make sense for their own wallet?
Most teams are not short on vision, but they are short on rationality.
- Is the team heavily invested in their product?
- Do they have a history in the industry they are working in (other than blockchain)?
- Does their roadmap make sense to you?
Look for the Moat
Buffett also looks for ‘moats’, which is a company’s competitive advantage over others.
Similar to how a castle protects the treasure of a kingdom, an economic moat is the protection a company has against competitors, whether through economic, social, or legal means.
For instance, one economic moat of a bank is the regulation required to open one. This is one reason why we don’t see hundreds of different banks these days’ they have a legal protection that keeps competitors out.
An economic moat could also be things like:
- High consumer switching costs
- A well-known, recognizable brand
- Network effect (particularly for two-sided marketplaces)
- Technology that’s impossible to copy
Hint: if the token you’re looking at could easily be replaced by copying bitcoin or ethereum code and changing a few parameters, there’s no moat!
Know Everything You Can
“Risk comes from not knowing what you’re doing”
Above all, Warren Buffett has a lust for research, beyond the ordinary.
This is simple to fix for yourself: just do your own research outside of the press releases and public-consumption avenues.
Check the industry they’re in: most are not totally new, but evolutions of existing rivers of money.
Another way you can do research is to study the trades of other, more experienced traders, as you can do on the Carboneum platform.
Buffett’s rule is that if you don’t understand the business, then don’t invest in it.
This is a hard rule to follow, because crypto is hard. Not only are the underlying technologies of cryptography and decentralization difficult to understand, but every company has a new and innovative way to apply them to their industry.
(Of course, by investing in only what he understands, Buffett has missed both the stratospheric gains of cryptocurrency trading, as well as the crashes.)
Invest Like a Lazy Person:
“Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.”
Though Buffett is active in research, he’s also incredibly lazy at actually investing. This makes him a great investor, because he is not expecting to see his stock holdings ‘pop’ or ‘moon’, but rather expects them to slowly accumulate wealth. And it turns out that’s what most great companies do, most of the time.
Actual value comes slowly, through the accumulation of effort (or multiplicative effects of social networks).
Buffett is more like a farmer than a hunter. He expects regular crops (dividends) and ample abundance, (with some variation due to seasons). Quite the opposite of the average crypto day-trader, who expects infrequent feasts (profitable trades) but often starves to death!
Why Invest Like Buffett?
Buffett’s style of investing seems like it might not apply to the digital world, but itâs more relevant ever.
Although many of the specifics are not relevant (particularly his emphasis on dividends), his core values still hold true.
- Look for digital assets that you believe are undervalued by everyone else.
- Research the team behind the platform.
- Invest like a lazy man!
Although Buffett himself, as far as we know, has no cryptocurrency holdings, his investing style can provide a breath of fresh air in the frothy market.