Investment strategies in detail
The best returning asset of the last year, and indeed the last decade, has been Bitcoin. The returns on offer for Bitcoin believers have simply dwarfed other investment options, and a tiny investment could have made you very rich indeed. The cryptocurrency also topped the performance table over the last year with a 61.5% return in pounds sterling. That’s relatively lacklustre by its own standards, compared to returns of 1,271% in 2017 and 5,758% in 2013. The performance figures are close to incomprehensible, and suggest that anyone jumping on the Bitcoin bandwagon now is somewhat late to the party. They might still have a jolly good time for a while, but they aren’t going to be quaffing as much champagne and caviar as the early birds. In order to generate the same return in the next ten years as the last decade, the Bitcoin price would need to rise to around £380 million per coin, or $520 million, at current exchange rates. Far-fetched doesn’t begin to cover it.
Those who have sat out the crypto craze can console themselves with the fact that the number of Bitcoin believers who have captured the full ten-year return is probably as small as that number is large. Ten years ago, Bitcoin was little known, and those who did know about it would have just witnessed the hacking of the Mt Gox Bitcoin exchange in 2011. Even if they had been brave enough to buy some coins, to enjoy the entire return of over £11 million on a £1,000 investment, buyers would have had to watch their investment double in value 13 times without cashing in any profits. They would also have had to casually sit by and not press the intense panic button as their investment fell by 73% in 2018. Indeed in 2010, a US computer programmer called Laszlo Hanyecz reportedly spent 10,000 Bitcoin on two pizzas, in what is widely regarded as the first ever cryptocurrency transaction. Those Bitcoins would now be worth over £300 million. This story suggests that even the very early Bitcoin adopters had no real inkling of what was to come.
The risk with an asset that has appreciated so vastly is of course that the price peaks, and the subsequent fall is just as astonishingly sharp as its ascent. One only has to look back just over twenty years to the madness of the dotcom boom to recall companies that experienced rocketing share prices, only to become worthless after the bubble burst. One dot com darling which weathered the storm and still survives today is Nokia. An early investor buying €1,000 of shares in 1991 would have seen their holding swell in value to €398,280 at the peak in 2000, though that would have fallen back to €33,620 today. A more cautionary perspective is that €1,000 invested at the peak would now be worth just €84.
Looking forward, the future of cryptocurrency still hangs in the balance. Goldman Sachs just issued a fairly bullish note on Bitcoin, which it sees increasingly usurping gold’s role as a store of value. But it would have to exhibit far less volatility, gain much greater regulatory approval, and achieve a lower carbon footprint, before it made it significant inroads into mainstream professional investment portfolios. Meanwhile the longer-term adoption of crypto as a means of exchange by businesses and consumers is still highly uncertain, especially given its volatility. Continued scrutiny and pressure from regulators on issues of consumer harm, money laundering, and carbon emissions may also dent crypto prospects, as could central banks issuing their own digital currencies. The golden rule of investing in crypto is not to invest any money you can’t afford to lose. And if you get lucky, it’s probably best not to splash out on a bottle of fizz before you’ve got the profits firmly in your bank account in pounds, dollars or euros, because gains can disappear in the blink of an eye. So far in the first few days of 2022, the Bitcoin price has already fallen 12%, which suggests it’s still less of an investment strategy, and more of a speculative gamble.
Behind Bitcoin believers, tech heads (as represented by the Legal & General Global Technology Index fund) have come a distant second place. However, a 34.1% return over 2021 and a 714.0% return over ten years is certainly not to be sniffed at. It is of course the performance of the US tech titans which have driven this success, and opinion over their future prospects remains firmly divided. These companies enjoy extremely strong competitive positions and boast customer numbers that have never been witnessed before in corporate history. But they also trade at high valuations, which could be trimmed if earnings growth slows, or if higher inflation and interest rates cause investors to reassess the premium they’re willing to pay for long term cash flows. Tech investors have done very well over the last decade, but putting all your chips in one sector is a risky business, so investors who have ridden the wave should consider diversifying beyond today’s digital success stories.
In third place over the last year, Warren Buffett’s investment approach has reaped rewards for Berkshire Hathaway investors, to the tune of 30.9%. Over ten years the world’s best known investor (and probably the greatest of all time), comes in in sixth place, with a total return of 350.9%. Buffett is associated with value investing, but as he points out, growth and value are two sides of the same coin. His investing approach can therefore be best described as Growth at a Reasonable Price, or GARP for short. Returns for Berkshire Hathaway in 2021 have been bolstered by a stake in Apple which was worth $120 billion at the start of the year. The stock gained 34% over the course of 2021, though we don’t know the exact value now as Buffett may have bought or sold stock. As at the beginning of 2021, Berkshire Hathaway held over 5% of Apple shares, and built his stake up at a cost of $36 billion between 2016 and 2018. Exposure to energy within the Berkshire Hathaway portfolio will also have helped performance over the last year as prices have shot up, likewise financial holdings have benefited from expectations of interest rate rises. The main share class of Berkshire Hathaway is currently trading at a princely $480,000 a share, but investors can gain exposure through the B shares which are available at a still quite pricey $320 a pop.
He might be the world’s best investor, but in 2021, Warren Buffett only narrowly beat our random fund picker, Binky the cat. Binky gets to choose one of 2,700 UK retail funds at the end of each year. While she is afforded the potential benefit of perfect hindsight, she selects funds by getting her human minions to pick one at random using something called Excel, so she can get back to important matters like napping and eating kibble. This year she chose the snappily titled Schroders Personal Wealth Multi-Manager Global Real Estate Securities fund, which returned a handsome 28.2%. The fund invests in a portfolio of global REITs (Real Estate Investment Trusts), and benefited from the vaccine-induced economic recovery, and the knock-on effect on property values. Binky’s scattergun approach hasn’t served her well over the long term though, and she ranks 21st out of 27 competing investment styles over ten years. She’s still ahead of bond buyers and cash savers though. For those tempted to choose funds with a dart and dartboard, Binky’s long-term returns suggest there are much better methods, unless you’ve got someone else to pay all your food and medical bills of course.
At the bottom end of the table, bargain hunters had a poor 2021, registering an 11.4% loss. These investors like to catch falling knives in the hope of a rapid rebound, so at the beginning of each year, they invest in the worst performing sector over the previous twelve months. In 2020 that was Latin America, but in 2021 it went on to produce similarly disappointing results. Over the long term the bargain hunting approach has also proved to be a flop, returning 35.8% and ranking 25th out of 27 investment strategies. Bargain hunting relies purely on performance to determine what is investable, and normally there is a good reason why prices are heading in a certain direction. Markets do tend to overreact, but it can take a considerable time for them to correct, so bargain hunting should be undertaken with a very long-term investment horizon in mind. It should also be done with reference not to price performance but to valuation, which relates the price of the stock to the underlying state of the company.
