Silicon Valley venture capitalist Marc Andreessen set Twitter tongues wagging yesterday when he dismissed Warren Buffett's skepticism about Bitcoin by suggesting that Buffett was just an old white guy crapping on a technology he didn't understand.

Andreessen, an investor in Business Insider, has a quick wit, so it's likely he was trying to amuse some conferencegoers rather than insult Buffett.

But the remark triggered another firestorm of discussion about Andreessen, Bitcoin, and Buffett's own suggestion — made back in the dot-com bubble — that the reason he didn't invest in technology was that he didn't understand it.

Some in the tech elite have taken Buffett's suggestion to mean that, by his own admission, Buffett lacks the expertise or brainpower necessary to understand technology.

I, on the other hand, have always assumed that Buffett made the "I don't understand" remark with typical self-deprecating-but-knowing Buffett charm — as in, "All you people piling into dot-com stocks must be much smarter than I am, because I just don't get it!"

In other words, I believe that, in typical Buffett fashion, Buffett understood everything he needed to understand about technology in the late 1990s, which is that technology investors had gone stark raving mad.

Similarly, I suspect that Buffett has a perfectly sophisticated understanding of Bitcoin.

I think that when Buffett deemed Bitcoin a "mirage" earlier this month, it wasn't because he is too dopey to understand Bitcoin. It was because he understands that the inherent value that Bitcoin fanatics think Bitcoin has is entirely in the eye of the beholders.

This doesn't mean that Buffett thinks Bitcoin's price will crash or that anyone speculating in Bitcoin is an idiot. It just means that Buffett doesn't think Bitcoin has any intrinsic value. And he's right about that, by the way. Bitcoin doesn't have any intrinsic value. It could trade at $0.01 or $1 million. Both "values" are perfectly defensible.

As for why Warren Buffett doesn't (usually) invest in technology, the Oracle himself explained this in detail back in 1999, when just about every other investor on the planet thought it was he who was stark raving mad.

In one of the best articles ever written about markets, published in Fortune in November 1999, Buffett had this to say about why he didn't invest in "innovation." The answer boils down to:

1. the relatively limited longevity and defensibility of competitive advantage in tech (the "moat" created by Microsoft's global monopoly in the late 1990s hasn't helped it much in the 2000s), and

2. the difficulty of identifying the few winners in advance and being able to buy them at reasonable prices

Yes, you can characterize this explanation as Buffett's "not understanding technology." But it would likely be more accurate to say that what Buffett doesn't understand is not, in fact, technology, but the prices other investors are willing to pay for technology.

Here's the Oracle from November 1999, five months before the dot-com crash:

I thought it would be instructive to go back and look at a couple of industries that transformed this country much earlier in this century: automobiles and aviation. Take automobiles first: I have here one page, out of 70 in total, of car and truck manufacturers that have operated in this country. At one time, there was a Berkshire car and an Omaha car. Naturally I noticed those. But there was also a telephone book of others.

All told, there appear to have been at least 2,000 car makes, in an industry that had an incredible impact on people's lives. If you had foreseen in the early days of cars how this industry would develop, you would have said, "Here is the road to riches." So what did we progress to by the 1990s? After corporate carnage that never let up, we came down to three U.S. car companies--themselves no lollapaloozas for investors. So here is an industry that had an enormous impact on America--and also an enormous impact, though not the anticipated one, on investors.

Sometimes, incidentally, it's much easier in these transforming events to figure out the losers. You could have grasped the importance of the auto when it came along but still found it hard to pick companies that would make you money. But there was one obvious decision you could have made back then--it's better sometimes to turn these things upside down--and that was to short horses. Frankly, I'm disappointed that the Buffett family was not short horses through this entire period. And we really had no excuse: Living in Nebraska, we would have found it super-easy to borrow horses and avoid a "short squeeze."

U.S. Horse Population



1900: 21 million

1998: 5 million

The other truly transforming business invention of the first quarter of the century, besides the car, was the airplane--another industry whose plainly brilliant future would have caused investors to salivate. So I went back to check out aircraft manufacturers and found that in the 1919-39 period, there were about 300 companies, only a handful still breathing today. Among the planes made then--we must have been the Silicon Valley of that age--were both the Nebraska and the Omaha, two aircraft that even the most loyal Nebraskan no longer relies upon.

Move on to failures of airlines. Here's a list of 129 airlines that in the past 20 years filed for bankruptcy. Continental was smart enough to make that list twice. As of 1992, in fact--though the picture would have improved since then--the money that had been made since the dawn of aviation by all of this country's airline companies was zero. Absolutely zero.

Sizing all this up, I like to think that if I'd been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough--I owed this to future capitalists--to shoot him down. I mean, Karl Marx couldn't have done as much damage to capitalists as Orville did.

I won't dwell on other glamorous businesses that dramatically changed our lives but concurrently failed to deliver rewards to U.S. investors: the manufacture of radios and televisions, for example. But I will draw a lesson from these businesses: The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.

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