Warren Wednesday 2/22
In the 1977 Berkshire Hathaway shareholder letter, Warren Buffett wrote:
“We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be:
one that we can understand,
with favorable long-term prospects,
operated by honest and competent people, and
available at a very attractive price.”
Yep! That’s it. That’s Buffett’s secret recipe for investment success. No crazy formulas or rigorous technical analysis.
For nearly six decades, the world’s greatest financial mind succeeded with just these four simple criteria. Investors looking to the web3 space for opportunities should follow Buffett’s approach.
Admittedly this will not be a cakewalk. Finding investment opportunities in the web3 space that meet all of these qualifiers is a tricky – and quite subjective – task.
Let’s break them down and see how simple businesses, with strong demand for their products + services, and a runway to grow earnings will be the winners in the long-run.
1. A business “that we can understand”
In a previous post, we spoke about the “Circle of Competence” – focusing our investments on projects and industries that we truly understand.
One great way to test yourself is by trying to explain how blockchain technology works to someone under the age of 10 or over the age of 60. It’s harder than it looks.
Seek out the boring options and make sure you clearly understand how a given cryptocurrency or NFT project will grow over time.
2. “With favorable long-term prospects”
Will your favorite cryptocurrency stay competitive over the long term? As a fellow $NANO bag-holder I can say from experience that most of them will suffer a similar fate: being a top 20 token at the height of their popularity only to fall off CoinGecko’s front page a few years later.
For a laugh, I compared the top 50 cryptocurrencies of January, 2018 and compared them to the market in February 2023.
Spoiler alert: 5 years later, only 24% (12) of tokens remained in the top 50. These were:
-
Bitcoin (BTC)
-
Ethereum (ETH)
-
Ripple (XRP)
-
Cardano (ADA)
-
Dogecoin (DOGE)
-
Tether (USDT)
-
Binance (BNB)
-
VeChain (VET)
-
Stellar (XLM)
-
Ethereum Classic (ETC)
-
Litecoin (LTC)
This means that lower ranked – and relatively unknown tokens – supplanted 38 projects that were in the top 50.
As the market for cryptocurrencies and NFT’s mature, we’re definitely getting a sense of long-term winners and losers. Wise investors should consider how long a given project has been around and the expectation of continued relevance in the current market.
3. “Operated by honest and competent people”
Another factor more difficult to assess today than it was in 1977 is the quality of the management team. Do you have a solid understanding of who is running the company or project? Is it an established team who is doxxed, or are you betting on a twenty-something with no track record of making sound, ethical decisions in volatile environments?
(achem)
4. “Available at a very attractive price.”
Admittedly, this is the hardest piece of the investment decision puzzle.
When the floor price of a $3 token can literally be $0.00000000001, how are we supposed to know if the asset is trading at a premium, or a deep discount??
Even discovering an interesting project with a solid team doesn’t mean the timing is necessarily right. Prices might be inflated or propped up by insiders waiting for an exit strategy.
Compelling web3 opportunities are out there, but a wise investor will wait for their favorite prospects to go on sale before entering a position instead of buying on hype.
If you’re tired of throwing darts at the proverbial investment board, use Buffett’s recipe for investment success to guide your way to sustainable web3 wealth generation.
If you found this post interesting give us a follow and stay tuned for more Warren Wednesdays featuring excerpts from our book, Warren Buffett in a Web3 World.
We took over 1,000 pages of wisdom from the Oracle of Omaha and condensed it into a snackable, easy-to-read investment guide to help you on your journey to grow wealth in the web3 space!