The surging price of Bitcoin in 2019 means that many investors may be contemplating its purchase. At the same time, the uncertain prospects for the FTSE 100 mean that the virtual currency may appear to offer investment appeal – especially if its correlation with other mainstream assets proves to be low.
However, the cryptocurrency continues to be a relatively risky place to invest. Just as it can rise quickly, its performance in 2018 shows that it has the potential to record significant losses.
As such, following the value investing strategy of Warren Buffett could be a better idea than buying Bitcoin. Buffett has outperformed the wider index over a long time period, and his focus on buying high-quality businesses on low valuations may prove to be just as successful over the coming years.
While the present time may not appear to be an opportune moment to buy shares due to risks such as a global trade war, Buffett’s strategy focuses on buying companies while other investors are fearful.
This situation naturally occurs every so often due to the cyclicality of the stock market. It doesn’t take a significant amount of negative news flow for investors to demand wider margins of safety and become increasingly fearful. And, while such periods can last for many months, or even years, the track record of the stock market shows that major indices have always recovered from downturns. As such, it is logical to wait for the stock market’s dips, and buy when share prices are at their most appealing.
Buffett’s strategy is simple, but has proved to be highly effective over a long time period. Certainly, there have been years where he has underperformed the wider index. During such times, the merits of a value investing strategy are often questioned. However, in the long run, the simplicity of buying companies with strong balance sheets and sound strategies when they trade at discounts to their intrinsic values has been shown as an effective means of outperforming the market.
Certainly, technological change means that virtual currencies such as Bitcoin could gain traction in the coming years. The problem for investors, though, is determining the risk/reward ratio of Bitcoin, since it has no annual reports or updates as is the case with listed companies.
As a result, a tried-and-tested value investing strategy seems to be a better means of improving your financial future. It may take time to deliver on its potential, in terms of downturns and periods of uncertainty for the stock market lasting for many months in some cases. But, for investors who have a long-term outlook, using the natural cyclicality of the stock market to your advantage may lead to improved wealth and the potential to retire early.
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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.