One of the most under-discussed topics in investing is that the average investor does not have to invest in any particular asset. Investors can pick and choose any business they want. There is never any obligation to invest in a security just because others are. What’s more, there’s never any obligation to hold onto that security if it underperformers expectations or something else comes along. As individual investors, we can pick and choose what we want to buy and hold and what we want to trade.
This is probably the biggest advantage individual investors have over large institutional investors, who may have to act within the constraints of investment mandates and support the 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 that means throwing good money after bad.
It’s the same with bitcoin. Crypto might have a place in some investors’ portfolios, but no investor is under any obligation to own these assets in a portfolio. Some investors may be comfortable owning them as part of a diversified portfolio. Others may not be. It all comes down to one’s own personal risk tolerance and what one understands about an asset. After all, one should never own an investment if one does not fully understand what they are getting into.
It's a personal preference
Warren Buffett (Trades, Portfolio) has never been a fan of bitcoin because he has only ever really invested in assets that produce cash flow, i.e. productive assets such as insurance businesses and farmland.
“If all the people in this room owned all of the farmland in the United States, and you offered me a 1% interest in it, and you said from the 1% interest in all the farmland of the United States, it’s a bargain price of $25 billion; I’ll write you a cheque this afternoon. $25 billion, and now I own 1% of all the farmland… If you told me you owned all of the bitcoin in the world and you offered it to me for $25, I wouldn’t take it because what would I do with it? I have to sell it back to you one way or another… it isn’t going to do anything… The farms are going to produce food.”
I don’t want to single out bitcoin. Buffett has also said the same about gold in the past and other assets that don’t produce cash flow. That’s really the crux of the argument.
If an asset does not produce cash flow, it does not generate any returns for its investors. Therefore, the only way investors will generate a profit is to sell that asset at a higher price.
Investment and speculation
There is a fine line between investment and speculation. Investment can be defined as acquiring a productive asset that produces cash flow while speculating can be defined as buying an asset with the aim of selling it at a higher price later on. There are some variations to this definition.
Buffett has clearly defined what he considers to be an investment in the past, and that’s what he is sticking to. I believe other investors may benefit from having the same approach. By avoiding things they do not understand and sticking to things they do, it may be possible to improve one’s investment performance over the long run, as one will not be buying securities one does not understand in the hope of making a profit by selling it at a higher price to someone else.