This is an opinion editorial by Craig Buddo, a freelance writer specializing in finance and a contributor at Bitcoin Magazine.
When not scrolling through his Rolodex of insults to level at Bitcoin, Charlie Munger, Berkshire Hathaway’s vice chairman and Warren Buffett’s confidant, is fond of invoking “mental models” espoused by the German mathematician, Carl Gustav Jacob Jacobi. Sounds intimidating, but it’s really quite straightforward. This simply states that many complex problems are best approached by inverting them, by coming at them backward. As Munger explains it:
“Invert, always invert: Turn a situation or problem upside down. Look at it backward. What happens if all our plans go wrong? Where don’t we want to go, and how do you get there? Instead of looking for success, make a list of how to fail instead … Tell me where I’m going to die, that is, so I don’t go there.” — Charlie Munger
Hold that thought.
As someone who became fascinated with the stock market and value investing after the Global Financial Crisis, bitcoin only came into hard focus for me when I started to think about it as though it were a stock. I believe now it’s much more profound than that, but it’s still how I frame my ownership some good way down the rabbit hole.
And though it would assuredly make its CEO projectile spray his Cherry Coke across the room and make its vice chairman swivel his one good eye to the heavens, it seems that the true analog to bitcoin in the public markets is, in fact, Berkshire itself.
Turn Berkshire upside down and you may be left with the thought that its phenomenal success stems in large part from philosophical and structural reasons that are exactly shared by Bitcoin, and that these will continue to propel both into the future.
Buffett’s stock picking in the public markets draws a lot of attention, but it’s really Berkshire’s wholly acquired portfolio of companies that make it so interesting. Compared to the rest of corporate America, Berkshire is radically decentralized. At last count, it owned 63 subsidiary companies spread over a very broad range of industries, including insurance, energy, railways, furniture and jewelry stores, mobile home manufacturers, private jet leasing and a plethora of other companies making and selling everything from batteries and underwear to business data, bricks and ice cream.
Uniquely though, once a company has met the standards for acquisition they’re basically told to just carry on as they were (Berkshire doesn’t invest in turnaround stories, so its acquired companies are already successful businesses). They retain autonomy to run their operations how they see fit, using the personnel and systems already in place. The role Berkshire plays for the company has been described as “the friendliest banker you can imagine — no interference, contracts, conditions, covenants, due dates, or other constraints of intermediation.” It’s how Berkshire is able to administer one of the largest corporations in the world with a staff headquarter count of around only 30 and no human resources department or even organization chart.
Paired with a massive treasury of cash and its public stock investments (also diverse, though with heavy concentration in financial services), there’s likely no turn in the economy, tech disruption, scandal or natural disaster that could permanently derail Berkshire, including the death of its founders. It’s built to last for a hundred more years.
It’s not clear that Buffett intentionally set out to create a decentralized corporation (he’s referred to his acquisition strategy as “haphazard” and “serendipitous”), or if its advantages made themselves obvious over the decades. In contrast, the whole genesis of Bitcoin was to solve the problem of how to decentralize money and its audacious realization has given the world a transparent and self-policing global monetary network free from central authority.
In “Margin Of Trust: The Berkshire Business Model,” longtime Berkshire chronicler Lawrence A. Cunningham explores Buffett’s relationship with the notion of trust, which he calls Berkshire’s “unifying principle.” There’s no corporation in the world close to Berkshire’s size that approaches trust with the same primacy, and no CEO who is probably trusted more.
Most obviously, the way in which trust shows itself is in the directness with which Berkshire acquires businesses: no investment bankers or financial intermediaries (difficult to trust), no hostile takeovers, no restructuring. Once they’ve done their due diligence and trust and integrity are established, it’s a straightforward transfer of ownership. Equally, sellers of businesses, many of them still run by founders, go to Berkshire because they trust it to be a responsible steward of what they’ve built and the individuals who work there.
Buffett’s annual shareholder letters are often unvarnished and candid assessments of his own failures and missteps. It’s an incredibly powerful yet very rare approach to corporate communication and one of the chief ways he’s built trust between those who run Berkshire and its shareholders. He views shareholders as true partners in the business and himself and the Berkshire board as trusted stewards of their interests. This is codified in Berkshire’s Owner’s Manual, a 1996 document that lays out the operational philosophy of the business. It states:
“We do not view the company itself as the ultimate owner of our business assets but instead view the company as a conduit through which our shareholders own the assets.”
Berkshire does an end run around financial intermediaries with trust, integrity and raw economic power; Bitcoin does it with software. In a true stroke of inversion genius, Satoshi Nakamoto solved the issue of “all the trust that’s required” in the fiat system by erasing its endlessly fallible human component. Instead, Bitcoin uses code to distribute the trust function among a huge network of computers, all of which must come to consensus before transactions can move forward and all of which are incentivized to guard against breaches of trust.
It isn’t a coincidence that Bitcoin was literally born out of the wreckage of the Global Financial Crisis, and that Berkshire came to perhaps its greatest prominence in the same historical moment, representing a bastion of trust and lender of last resort amid the reputational rubble.
For both Berkshire and Bitcoin, sophisticated and rational incentive structures might be the subsurface “management principle” that has propelled each more than any other. In Bitcoin’s case, it’s programmatic proof-of-work incentives to both mine bitcoin based on diminishing but more valuable block rewards, and economic-interest incentives to secure the network.
Incentives work double duty at Berkshire too. Business managers, corporate officers and investment advisors are aligned with Berkshire shareholders because, counterintuitively, they’re paid in salary and performance bonuses, not stock options.
Buffett is withering about the practice of rewarding high-level executives at public companies with stock-based compensation because it’s so often decoupled from actual performance, tends to encourage short-termism and it dilutes existing shareholders. Executives and founders at Berkshire-acquired companies however, are often allowed to retain an ownership percentage in their original business to incentivize an “owner” mindset.
The reason Berkshire has never split its original A shares — by far the most expensive stock in the S&P 500 — is also incentive based, or rather disincentive based. Speaking in 1995, Buffett explained his reasoning:
“We want to attract shareholders who are as investment-orientated as we can possibly obtain, with as long-term horizons … [with a cheaper, split-adjusted stock] … We are almost certain we would get a shareholder base that would not have the level of sophistication and the synchronization of objectives with us that we have now. And what we really don’t need in Berkshire stock is more demand … We don’t care to have it sell higher, except as intrinsic value grows.”
This shouldn’t be read as elitist: Around the same time, Buffett did create B shares of Berkshire stock when he saw unaffiliated financial firms begin to create (and charge high fees for) derivatives of the A shares to sell to small investors. Rather, it’s a use of the stock price to reflect long-term real value and cement alignment.
An essential feature of bitcoin is, of course, its hard cap of 21 million coins. Buffett has progressively created a hard cap on Berkshire stock as well, knowing that good things happen when continued intrinsic growth meets a static share count. In the last few years, Buffett has viewed his own company as a prime acquisition target, ramping up share repurchases based on a value formula indicating it was cheap against the market.
Imagine Bitcoin without it’s army of evangelists, writers, podcasters, speakers and HODLers. It would be a hollowed-out transactional thing like owning silver or soybean futures. Instead, the protocol has inspired millions of people around the world to gather, contribute, support, argue and create. Its revolutionary software has been buoyed and made meaningful from the outset by the substantial culture that has grown around it. In its start-up years particularly, when there was little monetary value to the network, culture and community kept the experiment alive.
Berkshire too has its army of devotees, most visible at the company’s annual shareholder meeting at the headquarters in Omaha, Nebraska once a year. Aside from the fun and tradition of the event, Buffett realizes that the culture that has grown up around Berkshire and the trust imbued in him as its leader is a potent advantage in shaping the company the way he deems most rational, rather than consensus thinking. He’s been able to marshal the majority of shareholders to fend off proposals to pay a dividend, split his roles, change compensation structures, divest from energy stocks and kick himself into early retirement.
Because of its culture, Berkshire has an unusually stable share ownership, especially characterized by a high number of long-term individual holders compared to institutional investors and pension plans. Along with a carefully devised corporate structure, it has allowed the company to mostly operate without fear of activism or pressure to divest or change course.
At the 2022 Berkshire meeting, Buffett again reiterated his view that bitcoin is worthless because it has no intrinsic value other than the potential to sell it to someone else for a higher price. Ric Edelman, founder of one of the largest financial advisory firms in the country and early Bitcoin advocate, takes on this argument in his recently published book “The Truth About Crypto.” He states that the models used to evaluate traditional assets such as stocks, bonds and real estate shouldn’t be applied to digital assets:
“That’s because digital assets lack the inputs that other asset classes have. That’s not a flaw of digital assets; what’s flawed is the belief that the absence of those inputs means bitcoin has no value.”
Edelman explains that bitcoin has an undeniable and triumphant record of over a decade of the market assigning a price to its value — and that price has risen by millions of percent — with massive demand-driven potential to continue outperforming.
But Berkshire and the way Buffett has shaped it do hold important lessons for bitcoin.
It reassuringly demonstrates in a single entity that principles of decentralization and an innovative approach to trust and incentives are world-beating attributes. It shows that culture, education and a palpable sense of ownership are the keys to weather helter-skelter markets.
It was recently calculated that Berkshire could lose 99% of its value and it would still have outperformed the S&P 500 going back to 1965. To reap those gains though you had to hold through nine recessions. Buffett says to reframe your ownership of stocks, to view them as a percentage ownership of actual businesses, not numbers on a screen bouncing around.
Imagine you owned a passive share of a successful local business that grew and expanded over the years: How much easier would that be to hold for decades as it grew your family’s wealth compared to how most people approach buying and selling stocks? In a downturn, you’re offered the chance to increase your percentage ownership by continuing to buy its discounted shares, knowing that recessions are a normal part of the business cycle.
If you view bitcoin in the same light, daily headlines about interest rates rising or growing correlation with the Nasdaq or crashing technical indicators reveal themselves for what they are: non-events or value opportunities to increase your stake.
To have the confidence and grit to hold for the long term, you must understand what you own. Buffett’s letters to shareholders are his way to instill this, with a great deal of Berkshire-specific commentary but also general investment lessons from one of the most rational and clear-sighted investors in history. It would be nice if owning bitcoin also came with an owner’s manual, and Nakamoto delivered an annual missive urging you to stay the course. Instead, seeking out quality Bitcoin content from books, articles and podcasts that focus on fundamentals rather than price is essential to fortify yourself against inevitable turbulence.
Buffett and Munger have both said they knew with conviction they’d become very wealthy, but neither was in a hurry to do so. “Hurry” in this context means using leverage to supercharge returns and both investors regularly warn against it. Some have stated this is hypocritical because Berkshire does invest the float from its insurance businesses into stock and business purchases, therefore leveraging the business. To which one might say, if you look in the mirror and Warren Buffett or Bill Miller or Michael Saylor looks back at you, go ahead and use leverage in your bitcoin purchases; if not, then probably don’t.
The issue, as Buffett laid out in his 2010 letter to shareholders isn’t really that leverage is bad on its face, it’s that even when it goes in your favor it’s working secretly to undermine you:
“But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade — and some relearned in 2008 — any series of positive numbers, however impressive those numbers may be, evaporates when multiplied by a single zero.”
In Berkshire’s early days, Buffett and Munger often invested alongside a talented capital allocator named Rick Guerin. His downfall was that he was in a “hurry” and sought to propel his investment returns with leverage that went awry in the sharp market downtown of the early 1970s. Margin calls came, and to raise capital, he was compelled to sell his Berkshire holdings to Buffett … for around $40 a share.
With Berkshire, bitcoin and investing in general, the smartest investors agree: The key to investing success is really just picking the right investment vehicle and then holding uninterruptedly to allow returns to compound for the longest possible period. Morgan Housel in “The Psychology Of Money” points out — among many incisive essays that Bitcoiners would benefit from reading — that the vast majority of Buffett’s wealth was accumulated after he qualified for Social Security:
“Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him … Effectively all of Warren Buffett’s success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years.”
So what can we do to HODL with just a little more iron in our grip?
Professionalize your holding: Take the steps to self-custody or use every possible security measure if you’re leaving it on an exchange. Know what you own and educate yourself constantly so sensational headlines don’t shake you out of a long-term mindset. Don’t fixate on price, think about adoption curves or other proxies for intrinsic value, really get to intellectual grips with the nature of exponential growth and compounding. Proceed very gingerly with lending or leveraging your holding: Are you risking what may be irreplaceable (your core holding) for something that’s unlikely to make much difference to your future self (incremental return)?
Do you have cash on the side to invest if the price crashes? According to Buffett, he was well into his investment career before he came to the clear realization that if you’re a consistent buyer of stocks (or bitcoin), long periods of falling prices are, in fact, exactly what you should be hoping for. A zooming share price is only good news if you plan to sell. This is rationally obvious but emotionally confounding, and almost impossible if you get sucked into the vortex of doom-laden headlines that accompany every downturn.
Berkshire A shares last traded at $20,000 in 1994. This year they broke through $500,000 per share for the first time. Invert Berkshire and its remarkable parallels to bitcoin show us the path to a similar valuation, and how to survive the journey.
This is a guest post by Craig Buddo. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.