I’ll be the first to admit it — I don’t understand bitcoin. I don’t have a clue about what blockchain technology entails.
What I do understand is that when EVERYONE is talking about an investment from the man on the street to the nightly news, something’s up.
Anecdotal evidence: One of my sons rode two hours to a friend’s hunting camp over the holidays. His friend’s dad, a smart but regular guy who doesn’t invest outside of the mutual funds in his 401(k), talked about nothing but the urgency to buy bitcoin.
Cue the railroad-crossing warning lights and bells.
As a greenhorn, I remember the same kind of frenzy, albeit on a much larger scale, surrounding tech stocks. At neighborhood barbecues, chamber of commerce functions, and even your dentist appointment, everything was tech stocks and tech stocks were everything.
However, few people had a real grasp on this wondrous new technology, let alone how to discern winners from losers. This resulted in bad investment choices and squandered money.
With stock markets grinding to record highs and seemingly incessant cryptocurrency get-rich-quick noise, it’s easy to forget what truly works over the long haul. So, now’s probably a great opportunity to revisit three of Warren Buffet’s best investing maxims about sticking with what you know.
1. “Risk comes from not knowing what you’re doing.”
We’ve all heard the joke, “What’re a redneck’s last words? ‘Hey y’all! Watch this!'” Countless DIY investors have lost fortunes picking stocks they heard about in an Uber, on the golf course, or from someone ranting on cable news.
If you don’t have any experience picking (which means “analyzing”) and investing in individual stocks, DON’T! If you’re used to mutual funds, stick with ’em. Exchange traded funds (ETFs) are a great alternative. You want to dabble in biotech? Buy the ETF — there are plenty of good ones out there.
2. “Never invest in a business you can’t understand.”
The Oracle of Omaha makes it look so easy. Buffett likes Coke. A lot of people like Coke. Coca Cola (NYSE: KO) sells a lot of Cokes. Buffett buys the stock. Pretty simple.
As I mentioned earlier, I don’t understand bitcoin. Honestly, I haven’t taken a lot of time to study it. However, at first glance, I can’t make heads or tails of it. It’s a safe bet I probably shouldn’t invest in it. Now, Cisco Systems (Nasdaq: CSCO), on the other hand, runs a business I can understand. They make telecom, mainly data transmission, networking equipment. The world consumes more and more data every day. Devices that receive and display the data need to be connected to work. Simple. Leave the rockets to the rocket scientists.
3. “Diversification is protection against ignorance.”
What Buffett is trying to say here is that investors willing to put all of their money in one idea are courting disaster. Remember all of the Enron employees who plowed their retirement funds into the company stock only to see it completely evaporate.
The Tech Bubble was another great example. Grandmothers who had been collecting solid dividends for decades from diversified portfolios of blue-chip stocks suddenly wanted a piece of the Information Superhighway. As we all know, it ended badly.
Action To Take: Warren Buffett didn’t become a billionaire by accident, and he’s managed to stay wealthy by not being stupid or chasing fads. That same disciplined focus on simplicity can also work for individual investors.
I’ll concede that some of the technology behind cryptocurrencies will most likely find its way into the mainstream. However, the “get rich quick” aura surrounding bitcoin has probably reached mania proportions. And, remember, “mania” is the root of the word “maniac”. Prudent investors would be well advised to watch from the sidelines.
Editor’s Note: If you’re looking for a way to kick off 2018 with the best possible picks for your portfolio, then consider checking out our brand-new special report: Top 10 Stocks for 2018. See why this might be the most important — and profitable — thing you read all year. Full details here.