In one sentence: Phil and Danielle define investing as high certainty of getting more money back, argue that Bitcoin is speculation (volatile, converted into dollars, nothing to value), compare it with tulip mania, and conclude that blockchain as a technology is investable through companies, while Bitcoin trading is gambling.
Key ideas
- Danielle's definition. Investing is putting money in with a high degree of certainty that more comes back. Phil adds that it should be over a roughly ten-year view. [00:00–02:00]
- Picasso test. A Picasso has no cash flow, so there's nothing to anchor its price except what the next buyer pays. Phil invokes Graham's voting machine in the short run and weighing machine in the long run to contrast with companies. [02:00–05:00]
- Is Bitcoin a currency? A currency should store the value of your labor and be accepted in its own right. Bitcoin swung by about 50% several times within weeks, and merchants price it against the dollar, which makes it more like a commodity. [05:00–09:00]
- Trading, not investing. Moves of about 15% a day let traders make or lose fortunes. Phil says that is trading, as with Picassos. [09:00–11:00]
- Why cheap coins appeal. Doubling a coin from one penny to two feels easier than $6,000 to $12,000. Phil compares it to penny stocks. [11:00–12:00]
- Jamie Dimon's warning. The JPMorgan CEO called it "worse than tulip bulbs" and a fraud. Phil tells you to hear both sides. [12:00–13:00]
- Tulip mania. In the 1630s in Holland (Danielle corrects Phil's "1700s"), prices of rare bulbs soared, then crashed on the lack of a "greater fool". Phil ties it to the first stock exchanges. [13:00–15:30]
- Where the real opportunity is. Blockchain companies that will generate cash flow are investable. Phil does not invest in currencies at all. [15:30–16:00]
- Mark Cuban's coin. He called Bitcoin a bubble yet backed an initial coin offering (a sports-betting platform, per Phil, with raised money he puts at $10 million; details are loose). Phil expects the SEC to take an interest. [16:00–19:00]
- Banks as intermediaries. A bank vouches for a payment, while blockchain broadcasts it to a network and prevents double spending. Phil wonders whether Buffett's Wells Fargo stake is threatened. He recalls Buffett's 2014 "mirage" comment as about a faster check. [20:00–23:00]
- Bottom line. "Blockchain as a technology is very investable. Bitcoin, not so." If you want to trade, know you are gambling. [23:00–24:00]
How it maps to RuleOne
- Rule #1 values only what can be valued: free cash flow, growth, a sticker price and margin of safety. Coins fail the first step, so the screen has none.
- If you suspect blockchain could disrupt a bank or payments holding,
/holdings/is where to ask that. This is a "Understand" question about the business, not a feature. - Treat the episode's price figures ($6,000 per coin) as a 2017 snapshot.
Buffett, Munger and Graham links
- Graham's voting machine and weighing machine: The Intelligent Investor, chapter 8, and Security Analysis.
- Investment versus speculation: The Intelligent Investor, chapter 1.
- Buffett's own warnings on non-productive assets: Berkshire 2011 letter on gold.
Words to know
- Speculation: buying for a price rise without a way to value the asset.
- Greater fool theory: paying too much because you think someone will pay more.
- Collectible: art, stamps or cars with no cash flow.
- Initial coin offering (ICO): raising money by selling a new coin.
Try this
Look up the 1636–37 tulip mania in a book or encyclopedia. Then on a stock page such as /stock/AAPL/ note the free cash flow and write why that figure makes it possible to value a business and not a coin.
Check yourself
- Why can't Phil value a Picasso or a Bitcoin the Rule #1 way?
Answer
They produce no cash flow, so there's no future cash to estimate and discount. - Why does he say Bitcoin falls short as a currency?
Answer
It's too volatile to store labor's value and is converted into dollars before use, so it behaves more like a commodity. - What is his bottom line on blockchain?
Answer
The technology is investable through companies with cash flow, but trading Bitcoin is gambling, not investing.
Short quotes
"You are not investing. You are gambling and you just got to make sure you know that." (Phil, ~23:30, auto-transcribed)