The Weekly View (12/11/17)

What’s On Our Minds:

Even with a strong year in equity markets, the meteoric rise in the value of Bitcoin has been grabbing headlines left and right.  Bitcoin’s run up in price has been nothing short of astounding.  For instance, if you invested $1,000 in bitcoin at the start of 2013 and never sold any of it, you would now have around $1.3 million. In 2010, a software developer paid 10,000 bitcoins for two large pizzas which today would be worth about $160 million.  Bitcoin has seemingly deified the laws of gravity as levels of speculation and fascination continue to increase.

Just this morning Bitcoin’s value has surged again as the Chicago based CBOE launched a futures exchange Sunday evening that allows traditional investors to trade futures contracts on the unregulated currency.  Even though it has been exciting watching Bitcoin’s meteoric rise, Tufton Capital does not believe there is a place for Bitcoin in a traditional investment portfolio given its “Wild West” like nature, its volatility, its shady history, and the cyptocurrency’s unproven track record.  Many critics of Bitcoin are suggesting it shows the classic signs of a bubble.

Market bubbles, like the tech bubble of the 1990’s, have formed for as long as there is record of exchange, and all follow a similar pattern of speculation.

In the early 17th century, the Dutch became enraptured by tulips, and created the first chronicled speculative bubble in history. As recorded in Charles Mackay’s Madness of Crowds, tulips began to grow rapidly in popularity all around Europe, and therefore tulip prices rose sharply. Many deft merchants identified this trend and made a large profit in trading tulips. Other merchants and the nobility, seeing these extraordinary profits, jumped into the tulip market. As a result, prices for tulips kept rising and rising, backed by nothing but speculation. Soon enough, nobles, farmers, seamen, chimney sweepers, and maidservants alike were all dabbling in tulips. Below is a chart of what one individual paid for a single tulip bulb!

Eventually, the tulip market ran out of new money to keep bidding up prices. As reality sat in, speculators all ran for the exit and prices plummeted. Many speculators lost all their savings as contracts they purchased were ten times the price that tulips were then trading.

This is an important lesson for us in 2017. As Benjamin Graham poignantly argues, “an investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” Graham would certainly have chuckled at otherwise serious individuals who lost a whole year’s salary on buying tulips.

Buying something, be it tulips, Bitcoin, or the hot stock of the day, as an investment because everyone else is doing it, or because of tremendous recent returns is not investing, but speculating. It may work in the short term, but it always has devastating effects in the long term.

The lessons of manias past are always important to keep in mind in an ever changing market. This isn’t to compare any particular asset to the tulip bulb craze, but it is always smart to study history in an attempt to understand the present. Many people will make bold claims about “X being in a bubble” or “Y will never go down.” A prudent investor, not speculator, will not be swayed by the opinions of crowds and will continue to drown out the noise and invest in quality assets at good prices.

BitCoin Price Cart (2014-Present)

Source: World Coin Index


Last Week’s Highlights:


US stocks had a strong week.  Equity markets closed on Friday near record highs as investors continue to wait for a finalized tax reform bill.

Friday’s job report was better than expected.  The US economy added 228,000 jobs in November.  Average hourly earnings grew 2.5% over the past year which is up from November’s 2.3% number.  GDP has risen by more than 3% over the past 6 months which continues to show a favorable backdrop for stocks.



Looking Ahead:

Investors will keep their focus on Washington D.C.  The GOP’s plan promises to be the biggest change to individual and corporate rates since Ronald Reagan’s tax overhaul in the 1980s.

Investors are expecting the Federal Reserve to increase its federal funds rate from 1.25% to 1.50% on Wednesday. Janet Yellen recently restated that she and her colleges, “continue to expect that gradual increases in the federal funds rate will be appropriate to sustain a healthy labor market and stabilize inflation around the FOMC’s 2% objective.”