The reality TV of the investment world?

“You look familiar…cricket?”

So a conversation began when I sat down at my local coffee shop this morning.

“No… finance”, I replied.

“I know your face from somewhere,” he said.

I told him what I do and that he had probably seen me on TV, and the penny dropped.

And so the conversation continued.

“My son made me buy Bitcoin yesterday. “Dad, there’s going to be a run on the banks,” he said.

“It was just a little. But I’ve already made twenty dollars.”

Now, I’ve written about before Bitcoin.

It is not a topic you bring up, at least not negatively, if you are afraid of hearing some unvarnished opinions and freely expressed character analysis.

Fortunately, I’m not.

I bought $100 worth of Bitcoin a few years back just to go through the process. And I still own it. (Due to my lack of due diligence, I had managed to select an app that allowed Australian customers to buy but not sell! Apparently that has changed… but I haven’t bothered to check.)

But – and this is the part I’m writing from under my desk – I don’t think Bitcoin is an investment.

Why?

Because owning it relies on a guess (gamble?) that someone might pay you more for it in the future. It has no operations. It provides no income. It just… sits there.

“Ah, but it’s no different than gold” some will cry.

And they are not wrong.

But here is my two-pronged rebuttal:

First, I don’t think gold is an investment grade either. (Sorry, Bitcoiners, you have to compete with the gold bugs to get in line to insult me ​​now!) It also does nothing, and produces nothing.

But secondly, gold at least has an incredibly long history of appreciation and acceptance as an asset, and it is possible to at least stop its value based on the cost of mining.

Yes, yes… send me your hate mail if you must.

(Fair warning – our member services team are very good people who don’t need to read abusive or offensive language and have been given carte blanche to delete correspondence containing the same. I’m very happy to hear from people with a different view, but abusive language will be sent to the fine bone border with a flick of the metaphorical wrist.)

Will anyone pay more for Bitcoin at some point in the future? May be.

And you are welcome to speculate on that outcome, if you choose.

Just don’t call it investing.

But also – and this is my main point – don’t let it distract you.

Look, there’s a very, very long list of things that could happen.

(Almost) anything is possible.

But likely?

Look, investing is not a pursuit that requires you to simply guess what someone will pay for an inanimate object (real or digital) in the future, without any fundamental basis.

What will people pay for gold in 10 years?

What will they pay for Bitcoin in 15 years?

Who knows. There is nothing to base your guess on, except a blind guess at human behavior.

It is – and this will really get them going – the equivalent of reality TV.

There is no reason Bitcoin won’t trade for $0.01 in 2035. Or $1 million. It comes down to one simple thing: how “popular” the resource is.

No, not for what it’s worth. Its different.

Compare that to a profitable operating business. Or, simply put, as Warren Buffett likes to say, farmland.

How much would you pay for an acre of prime farmland?

You can start by thinking about what the country can do.

What stock or crops will it support? What would make the most profit, based on the price you could get, and the cost of production?

You would allow for some good years, some terrible years, and some good years. You will add it all up and then decide how much you want to pay the current owner to buy that land.

Of course, we cannot know what the weather will do. Or how prices can fluctuate. So you want to allow for all of this when deciding on a price.

That’s what investing is. It looks at what we call the “fundamentals” of an asset – what it generates, and how that might change. And then pay a price that takes all this into account and still offers the good potential for profit.

That doesn’t mean people don’t make investment mistakes. And that doesn’t mean people don’t hijack the word and apply it to other things, hoping to convince themselves they’re “investing” when they’re really gambling or speculating.

But it means that, done right, they consider the range of future cash flows from an asset, and then decide what price they will pay to get a share of those cash flows.

If you don’t… you’re just guessing.

You bet on being able to guess how others might feel in the future.

Will they still like Bitcoin? or gold?

Will they be excited? Or pessimistic?

Who knows.

And yet they will “invest” thousands (as a group, many, many millions) of dollars on the basis that they somehow believe they can?

By the way, I don’t intend to be critical of those people themselves. Everyone has the right to use their money as they wish.

But even if they guess right, it’s just not investing.

Now, lest you think I’m just here to lash out, I’ll tell you why I’m writing all this.

And – believe it or not – the motivation has nothing to do with Bitcoin or gold.

My motivation is to stop you from fixating on short-term… especially short-term risks.

Like the guy I met this morning whose son has convinced him to change his investment strategy because he has an inkling of what might happen next.

His crystal ball must be better than mine.

And even if the risks he fears may actually occur, they may not either.

See, if your investment philosophy involved avoiding all risk, then the bad news is that, well, it’s not possible.

Do you consider “cash” to be risk-free? There is no guarantee that the state guarantees will be fulfilled in each individual circumstance. (But that’s about as low risk as you can get in this life.)

Cash under the mattress, or in a hole in the backyard? Good luck with that.

But even if you accept these risks, what about inflation eating away at your purchasing power as you read this?

And other risks?

Well, people have been telling me that China was going to have a “hard landing” for the last dozen years.

Real estate came crashing down in 2009.

There has been a recession “looming” every year since the GFC.

The fiat currency was going to die.

You get the idea.

Do you know why stocks have gone up over time?

Because companies make things that people want, and make them profitably. And they make more of them, which leads to more profits.

Sure, sometimes the market gets too exuberant. Sometimes too pessimistic.

But the companies? They continue to do their thing. Someone dies. Some are born. But as a group they persevere.

No, there is no guarantee. I’m not allowed to give you one. And morally I wouldn’t anyway… because there are no guarantees for the future.

But I’ll tell you what I do.

I regularly invest by trying to pay decent prices for a diversified portfolio of understandable businesses. And then I wait.

Some years will be better than others for these businesses.

Some years will be better than others, for their stock prices.

But if I have chosen well, those companies will be bigger and better, as a group, in 5, 10 and 20 years. And if I have paid a decent price, I expect to be well rewarded.

If you don’t want to pick companies, you can just buy a broadly diversified, low-cost index fund.

Or… you can have a chat about whether people will still think Bitcoin, or gold, will be cool in 2033.

I mean, it’s not like some fads end, right?

Maybe it’s not a fad. But maybe it is.

The choice is yours. But please, choose wisely.

Wonder!