Over the course of his long career, investor Warren Buffett has lived through many ups and downs – some of them dramatic.
When the stock market moves around it can seem alarming.
Markets have been riding high lately, but the amount of volatility due to economic uncertainty and geopolitical tensions remains notable.
I find it can be helpful to remember Warren Buffett’s approach to stock market volatillity
A common but dangerous mindset
One of the basic problems here is how people think. A lot of people – even some long-term investors – start to feel worried when they see that a share they own is now worth less than they paid for it.
But should they?
If they were speculators, hoping to buy a share at a certain price before selling it in short order for a higher price, that attitude might be understandable.
But trading is not the same as investing.
Warren Buffett’s approach is to think of his share as a small stake in a business.
Each day that the stock market is open, it offers him the opportunity (but not obligation) to buy or sell the share at a given price.
Why would he sell, though? After all, Warren Buffett aims to buy into what he sees as great businesses selling at attractive prices, then hang onto his stake for the long term.
Taking the rough with the smooth
Seen that way, it makes sense that Warren Buffett has said it would not bother him if the stock market was closed for a decade.
It is also understandable that Buffett simply ignores a tumbling share price if he feels confident that the investment case for a business remains the same, no matter what is happening in the market.
As a believer in long-term investing, Warren Buffett hangs on rather than panicking and dumping what he thinks are good businesses for less than he reckons they are worth.
Many investors get panicked by volatile markets. By contrast, billionaire Buffett sometimes uses them as a buying opportunity.
Getting ready for a crash, whenever it comes
I try to do something similar.
Sooner or later, there will be another stock market crash – and it could throw up bargains.
But nobody knows with certainty when that will happen. Such buying opportunities can be short-lived.
So it pays to be prepared. My approach is to maintain a list of high-quality businesses I would like to invest in — if I could do so at an attractive price.
One on my list is Nvidia (NASDAQ: NVDA).
When the next crash comes, I reckon there is a fair chance that large AI-exposed companies could be hit hard it given how much their share prices have run up over recent years.
At the right price, that could potentially present me with a buying opportunity.
A key risk here is that AI demand will wane. Another risk is that chip pricing will fall as competitors offer chips that are not quite as good, but far cheaper. That could hurt Nvidia’s profit margins.
But even if AI demand falls I don’t expect it to disappear. Additionally, before AI, Nvidia already had a huge business producing chips for other applications like gaming. I expect that to continue.
Warren Buffett likes companies that have a ‘moat’ or competitive advantage. Nvidia’s proprietary designs provide that.
