Over the very long term, the stock market has served as a wealth-creating machine. Though it'll have its down years and finish behind commodities or housing in others, no asset class has consistently generated higher average annual returns.
Then, a little over a decade ago, cryptocurrencies made their presence known and turned this long-lived thesis on its head.
Perhaps no digital currency has created more buzz among the retail investing community than Dogecoin (DOGE 0.46%).
Dogecoin has delivered huge returns without any substance
The "why Dogecoin?" answer has a lot to do with its past performance. It's no secret that cryptocurrency traders are momentum chasers in a market that's far more susceptible to violent price swings than traditional equity markets. In a recent six-month stretch, Dogecoin rallied as much as 27,000%. Looking further back, it's up by more than 128,000% from where it could be purchased in December 2013.
But in spite of these gains, Dogecoin is flawed in many respects. As an example, its optimists often tout its growing utility as reason to be excited. But in nearly every aspect of its real-world utility, Dogecoin is a failure.
- Dogecoin's blockchain handles about 50,000 transactions daily, which means it would take more than 38 years to match the 700 million combined transactions that Visa and Mastercard handle each day.
- A minuscule 1,300 businesses worldwide have come to accept Dogecoin as a form of payment, and it's taken eight years simply to reach this figure.
- Dogecoin's transaction fees can be undercut by more than a half-dozen other popular cryptocurrencies, and in many instances its settlement and validation times are slower than its peers.
In sum, Dogecoin has virtually no use beyond being traded on cryptocurrency exchanges.
It's also being violently whipsawed by the whims of Tesla CEO Elon Musk. A future currency shouldn't swing 30% if Musk posts a Dogecoin meme, but that's exactly what we've been seeing. It's hard to take Dogecoin seriously when there's absolutely nothing tangible in its sails and its community keeps pumping social media with misinformation about its real-world use case.
This popular stock has crushed Dogecoin in the returns department
But maybe the bigger surprise is that you can find stocks that have actually outperformed Dogecoin. In fact, patient investors in one mega-cap stock have been rewarded with a more than 26 times greater return, in aggregate, than Dogecoin.
Earlier this year, conglomerate Berkshire Hathaway (BRK.A 0.37%) (BRK.B 0.36%), which is run by legendary buy-and-hold investor Warren Buffett, published its annual shareholder letter. Within that shareholder letter, Berkshire breaks down its performance under Buffett's tutelage all the way back to the beginning of 1965. In that stretch, his company's stock has returned an annual average of 20% per year. On an aggregate basis, this works out to a gain of 2,810,526%.
But I'm not finished. Through June 1, 2021, Berkshire Hathaway's Class A shares (BRK.A) were up another 25.29% on a year-to-date basis. This works out to an aggregate return under Buffett's leadership of 3,521,308%! Berkshire Hathaway has outrun Dogecoin's return of 128,388% by close to 3,400,000 percentage points -- and it's done so without paying a single dividend to its shareholders.
How has Buffett absolutely crushed Dogecoin? For one, he values proven business models and companies with brand names over coin-flip investment opportunities. The Oracle of Omaha's company has owned shares of Cola-Cola (KO 1.16%) since 1988. Coke sells its products in all but two countries worldwide (North Korea and Cuba), has over 20 brands generating at least $1 billion in annual sales, and is easily one of the most-recognized brands around the globe. Regardless of whether the economy is booming or struggling, Coca-Cola is going to be just fine, and Buffett knows it.
Speaking of the economy, Warren Buffett has also packed his company's investment portfolio with cyclical businesses -- i.e., companies that perform well during economic expansions and struggle during recessions. For Buffett, this is a simple numbers game. While recessions are inevitable, they typically only last a couple of quarters, at most. Comparatively, bull markets and periods of expansion are almost always measured in years. In fact, the last economic expansion in the U.S. lasted a record 11 years. If Buffett and his team exercise patience, they should have no trouble building wealth over time.
Berkshire Hathaway may not pay a dividend to its shareholders, but this doesn't mean Buffett and his team don't value a steady income stream. Buffett's company is on pace to generate more than $4 billion in dividend income this year. Dividend stocks are most often profitable and have time-tested operating models.
In short, Buffett's success has everything to do with focusing on fundamental factors and allowing the data to work its magic over time. That's a far cry from Dogecoin, which is driven by hype and misinformation, and has virtually no fundamental factors working in its favor.