One of the questions plaguing the stock market over the past few months is whether we may be in an AI-fuelled stock bubble – and when it might burst. As someone who has lived through multiple bubbles over the course of decades, I reckon billionaire investor Warren Buffett has a lot of wisdom to offer in this regard.
Don’t try to time the market
Buffett has sat on large piles of cash at points, leading some to think he was trying to wait for a big enough market downturn to spend. But he is smart enough to know that nobody can time the market with total confidence – and he does not try to do so.
Instead, his approach has been to buy individual shares when he thinks they are attractively valued, hold them for the long term, and then sometimes sell them.
That can look like timing the market because it involves buying shares at what look like cheap prices. Often, a good moment to do so is following a stock market crash.
But buying bargains when they appear is not the same as trying to time the market. Buffett did not pile into dotcom stocks then hope to bail out on a big profit before the market peaked, for example.
Sticking to what you know and understand
In fact, Buffett did not bother buying any dotcom stocks at all back in the heady days of the turn of that era. Nor did he buy leading AI shares before stepping down as chief executive of Berkshire Hathaway at the turn of this year.
There is a simple reason, even before getting onto valuation. Buffett likes to stick to what he understands. He long expressed a belief that he did not have the necessary knowledge to judge whether tech companies had the sort of business characteristics he looked for.
Only years later did he invest in IBM and Apple.
A Buffett-like moat
One tech share he and partner Charlie Munger mused about missing out on was Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).
The reason was that, in this case, they felt they did have insights into Google and failed to act on them. Berkshire owned a business that was already splashing a lot of cash buying ads on Google, so Buffett and Munger could have put two and two together to see the wider potential of the Google business.
Alphabet has several characteristics Buffett likes in a stock and one is its ‘moat’. This is how Bhe describes a competitive advantage that keeps rivals at bay.
Google’s moat comprises its huge volume of user data, proprietary technology and a proven money-making model not only through search but other properties like YouTube too.
AI is a risk to Google’s search dominance. It could lead to less searches and therefore less advertising revenue. But it could also present an opportunity for Alphabet, given the company’s huge amounts of organised information that could help it make use of AI itself.
Alphabet has a massive customer base and has proven highly cash generative over time (though AI costs could reduce that).
But, like Buffett, I like to buy into great businesses at attractive prices. The current Alphabet stock price is too high for my tastes, so I will not be investing.
