Weekly Roundup, 10th May 2021

Weekly Roundup, 10th May 2021

We begin today’s Weekly Roundup with bitcoin.


Eva Szalay

In the FT, Eva Szalay wondered whether bitcoin was a bubble, or too good to miss.

BTC is up six times in a year (from $7K to $54K at the time the article was written).


As well as the price rise, we’ve seen more “mainstream” support than during the 2017 bubble, from Elon Musk, hedge fund managers and now – according to rumour – JP Morgan.

  • And a couple of weeks ago, we had the IPO of Coinbase, at a market cap equal to that of BNP Paribas (founded in 1848).

Eva warns that the wider crypto space is still home to lots of scams.

  • There is little protection (or tax-sheltering) available in the crypto space, so you need to be convinced by the potential for price appreciation, and to be prepared to diversify your holdings and counterparties.

Eva also notes an age gap:

In contrast with younger investors, those aged 55 or over remain resolutely on the
margins with just 8 per cent of survey respondents in this age group trading digital
currencies, [a] Charles Schwab study found.

And she mentions the environmental footprint of crypto:

The carbon emissions associated with bitcoin equal that of Greece, according to
research by Bank of America.

It’s a different country every week, but what I would like to see is the energy cost of other activities – computer gaming, say, or gold mining or the existing banking system.

  • Everything costs (transforms) energy, and hence usually costs carbon too.

Eva says that the more sober BTC enthusiasts recommend an allocation of only 1% to 2% of your portfolio.

  • And you should obviously avoid leverage on such volatile assets.

Crypto derivatives are banned for UK retail investors, though you can still buy blockchain ETFs.

Luno, a crypto exchange, found in 2020 that 55% of its clients had no other investments than crypto. Luno CEO Marcus Swanepoel, said:

Never spend more money than you can afford to lose. It’s very risky, there is no doubt about it.

In terms of exposure, Eva mentioned Coinbase and Revolut, which are both too expensive for me (particularly Revolut).

  • Luno looks a better bet (though they are the firm responsible for the infamous bitcoin ad on the side of a London bus).

Crypto derivatives are banned for UK retail investors, though you can still buy blockchain ETFs.


BRK to SandP

Last weekend was the Berkshire Hathaway annual shareholder’s meeting – “Woodstock for capitalists”.

  • It was held online for the second year running, and you can watch it all on YouTube.

Despite the lack of crowd, there were a few interesting things said.

Buffett and Munger were asked about bitcoin and as usual, Warren sidestepped:

We probably got hundreds of thousands of people watching that own bitcoin, and we probably have two people that are short. So we got a choice of making 400,000 people mad at us and unhappy, and, or making two people happy, and that’s just a dumb equation.

But Munger gave it both barrels:

I hate the bitcoin success and I don’t welcome a currency that’s useful to kidnappers and extortionists, and so forth. Nor do I like just shuffling out of extra billions and billions and billions of dollars to somebody who just invented a new financial product out of thin air.

So, I think I should say modestly that I think the whole damn development is disgusting and contrary to the interests of civilization.

As usual, bitcoin maximalist declared that Berkshire’s opposition was “good for bitcoin”.

  • Perhaps they are right.

Like everything else in the world right now, bitcoin is dividing the investment community into two entrenched camps.

  1. Stock-picking value investors – who are usually old guys – won’t touch it.
  2. Lots of newer “investors” – who are usually young guys – think that everything else is doomed.

At the moment,  I don’t meet many people in my middle camp of thinking this might be another store-of-value asset class that is worth allocating 1% or 2% of your portfolio to.

  • I think there will be many more like me in a couple of years, as institutional penetration continues, and easier and safer ways to hold bitcoin are introduced.

Largest firms 2021

A second interesting topic was the changing nature of success.

  • A slide showing the largest firms of 2021 features a lot of US companies at the top.

The same list from 1989 was dominated by Japanese firms.

  • And none of the 2021 US firms was present.

Largest firms 1989

Buffett pointed out that the best ideas of 1989 did not turn out so well.

We were just as sure of ourselves, and Wall Street was, in 1989 as we are today. But the world can change in very, very dramatic ways.

It’s a great argument for index funds. The main thing to do is be aboard the ship.

He also talked about the automobile craze from his father’ youth:

Everybody started car companies just like everybody’s starting something now that can be where you can get money from people. There were at least 2,000 companies
that entered the auto business, because it clearly had this incredible future.

In 2009, there were three left, two of which went bankrupt. So, there is a lot more to picking stocks than figuring out what’s going to be a wonderful industry in the future.

The tension between value investing and crypto leads into the question of whether Buffett and Munger – arguably the greatest investors of all time – still have relevance.

  • They are very old, and Berkshire has underperformed the S&P 500 for more than a decade.

They were very late to tech, and growth investing has never been their thing.

  • They are also long-time gold bears (calling the metal a “pet rock”), so bitcoin was never likely to appeal.

And the enormous scale of their conglomerate acts against them (hence the massive cash pile for which they can find no use).

  • With inflation on the way (as they admit themselves), finding a home for this cash is more urgent.

BRK price to book

Berkshire groupies will also have been excited to hear that Greg Abel –  head of Berkshire’s noninsurance operation – will be Warren’s successor.

Berkshire has long enjoyed a sort of corporate exceptionalism, thanks to the halo over Mr Buffett. With disquiet growing over so-so returns, poor disclosure and more, that benefit of the doubt looks threatened.

The newspaper notes that apart from the disadvantages of large scale, one of BRK’s long-term advantages has evaporated:

Berkshire has long used the float (premiums not paid out as claims) from its giant insurer, Geico, to funnel low-cost capital to its other operations. But these days capital is cheap for everyone.

There have also been bad bets on Occidental Petroleum, Kraft Heinz and airlines, and over-paying for Precision Castparts.

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