Marc Andreessen, a venture capitalist from Silicon Valley, set many tongues wagging on Twitter the other day when he immediately dismissed Warren Buffett’s Bitcoin skepticism. He suggested that Mr. Buffett was an old white guy speaking negatively about technology that he didn’t understand. Andreessen is quite witty and quick, so he probably wasn’t trying to insult Buffett but instead amuse certain conference goers.
But the remark itself triggered another major discussion about Bitcoin, Andreessen and a suggestion from Buffett made back during the .com bubble, which was that he didn’t invest in technology because he had no understanding of it.
Some of the technology elite take Buffett suggestion to mean that the Oracle of Omaha does not have the brainpower or expertise to understand tech.
Other people believe that Buffett made the comment about not understanding as a typical self-deprecating remark. Ultimately I believe that Buffett fully understands everything he needed to know about technology in the 1990s and now, which is that tech investors were going crazy at the time.
Also, I believe that Buffett has a perfect understanding of everything in relation to bitcoin and what it’s all about.
Earlier this month, when Buffett called Bitcoin a mirage, it had nothing to do with his understanding of it. He said it because he believes its inherent value is only there for those who believe that it is there.
On the contrary, this statement does not mean that Buffett believes its price is going to crash. He doesn’t necessarily believe that the people speculating in this new “currency” are morons. He just doesn’t find the intrinsic value.
As to the reason why Buffett doesn’t typically invest in technology, he explained this in incredible detail back in 1999, at a time when investors considered Buffett crazy for avoiding technology stocks.
In an article published by Fortune in 1999, Buffett had a few things to say about the reasons why he never invested in innovation. His answers are boiled down to:
1. The relatively limited longevity and defensibility of competitive advantage in tech (the “moat” created by Microsoft’s global monopoly in the late 1990s hasn’t helped it much in the 2000s), and
2. The difficulty of identifying the few winners in advance and being able to buy them at reasonable prices
You can certainly characterize this explanation as Warren Buffett not really understanding technology. But more accurately, it’s not that Buffett doesn’t understand technology itself, he doesn’t understand the amounts that investors are willing to pay for it.
Here’s what Warren Buffett had to say in November 1999, five months after the dot-com crash:
I thought it would be instructive to go back and look at a couple of industries that transformed this country much earlier in this century: automobiles and aviation. Take automobiles first: I have here one page, out of 70 in total, of car and truck manufacturers that have operated in this country. At one time, there was a Berkshire car and an Omaha car. Naturally I noticed those. But there was also a telephone book of others.
All told, there appear to have been at least 2,000 car makes, in an industry that had an incredible impact on people’s lives. If you had foreseen in the early days of cars how this industry would develop, you would have said, “Here is the road to riches.” So what did we progress to by the 1990s? After corporate carnage that never let up, we came down to three U.S. car companies–themselves no lollapaloozas for investors. So here is an industry that had an enormous impact on America–and also an enormous impact, though not the anticipated one, on investors.
Sometimes, incidentally, it’s much easier in these transforming events to figure out the losers. You could have grasped the importance of the auto when it came along but still found it hard to pick companies that would make you money. But there was one obvious decision you could have made back then–it’s better sometimes to turn these things upside down–and that was to short horses. Frankly, I’m disappointed that the Buffett family was not short horses through this entire period. And we really had no excuse: Living in Nebraska, we would have found it super-easy to borrow horses and avoid a “short squeeze.”
U.S. Horse Population
1900: 21 million
1998: 5 million
1998: 5 million
The other truly transforming business invention of the first quarter of the century, besides the car, was the airplane–another industry whose plainly brilliant future would have caused investors to salivate. So I went back to check out aircraft manufacturers and found that in the 1919-39 period, there were about 300 companies, only a handful still breathing today. Among the planes made then–we must have been the Silicon Valley of that age–were both the Nebraska and the Omaha, two aircraft that even the most loyal Nebraskan no longer relies upon.
Move on to failures of airlines. Here’s a list of 129 airlines that in the past 20 years filed for bankruptcy. Continental was smart enough to make that list twice. As of 1992, in fact–though the picture would have improved since then–the money that had been made since the dawn of aviation by all of this country’s airline companies was zero. Absolutely zero.
Sizing all this up, I like to think that if I’d been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough–I owed this to future capitalists–to shoot him down. I mean, Karl Marx couldn’t have done as much damage to capitalists as Orville did.
I won’t dwell on other glamorous businesses that dramatically changed our lives but concurrently failed to deliver rewards to U.S. investors: the manufacture of radios and televisions, for example. But I will draw a lesson from these businesses: The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.