Billionaire hedge fund manager John Paulson described cryptocurrencies in an interview last year as “a bubble with little to no intrinsic value.” And more colourfully he said, “I would describe cryptocurrencies as a limited supply of nothing.” He then explained that the price will go up when there’s demand for the limited supply of Bitcoin and other cryptos. But when demand falls, the price will go down.
He concluded by saying, “There’s no intrinsic value to any of the cryptocurrencies, except that there’s a limited amount.”
Slow and steady can win the race
But I’m aiming to get rich using the time-tested strategy of buying the stocks of quality businesses and holding them for a long time. My portfolio may not move as fast as it would if it was stuffed with cryptocurrencies. But it may not be as volatile either.
Some of the best stock-picking investors around manage to achieve annualised gains of around 30%. For example, Peter Lynch achieved gains close to that level when he ran Fidelity’s Magellan fund. However, the most famous investor of them all — Warren Buffett — achieved annualised gains of 20% between 1964 and 2020.
That might seem like a stock investing tortoise compared to the cryptocurrency hare. But the trick is to keep compounding those gains year after year. And the outcome can be spectacular. For example, Buffett reckons his overall gain over the entire period came out at 2,810,526%!
However, it’s possible to achieve respectable gains from the stock market by simple passive investing as well — without all the effort of picking and monitoring the stocks of individual companies. For example, Buffett reckons that over the same period as he achieved his spectacular returns, America’s S&P 500 index delivered annualised gains of 10.2%. And the overall return works out at a very decent 23,454%.
If I could have invested £1,000 in a passive index tracker fund following the S&P 500 in 1964, I’d have had an investment worth well over £200,000 in 2020 — not too shabby!
A hybrid approach to stock investing
Of course, there’s no guarantee the stock market or individual stocks will deliver a similar outcome for me in the future. However, I’m investing in a few index tracker funds and individual company stocks I’ve chosen carefully rather than in cryptocurrencies.
For example, I put regular money into a tracker fund that follows the fortunes of America’s S&P 500 — it would almost be silly of me not to after Buffett’s illustration! And I’m also tracking the UK’s FTSE 100, FTSE 250 and small-cap indices. Then for added spice, I’ve got collective investments following emerging markets around the world.
But many investors feel a compelling itch to develop their own stock-picking prowess over the years, including me. So I’m having a shot at raising the level of annualised returns in my portfolio by following a strategy to select and hold the shares of individual companies. Of course, all shares carry risks. But my overall strategy is a hybrid of passive and active investments. And I’m hoping that mix will help me become richer over time.
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The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
