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During his long career, investor Warren Buffett has faced many problems – some of them surprising.
When the stock market moves it can seem scary.
Markets have been rising significantly recently, but the amount of volatility due to economic uncertainty and geopolitical tensions remains significant.
I find it helpful to remember Warren Buffett’s approach to stock market volatility
It’s a common but dangerous concept
One of the basic problems here is the way people think. Many people – even long-term investors – start to feel anxious when they realize that the share they own is now going to be worth less than what they paid for.
But should it?
If they were speculators, hoping to buy a share at a certain price before selling it shortly at a higher price, that attitude might be understandable.
But to trade not the same as investing money.
Warren Buffett’s approach is to think of his share as a small part of the business.
Each day that the stock market is open, it gives him the opportunity (but not the obligation) to buy or sell a share at a certain price.
However, why would he sell? After all, Warren Buffett aims to buy what he sees as large businesses that are selling at attractive prices, and hold on to his stake for a long time.
Taking the rough with the smooth
Seen that way, it makes sense that Warren Buffett said it wouldn’t bother him if the stock market closed for ten years.
It is also understandable that Buffett simply ignores a falling share price if he feels confident that the business investment case remains the same, regardless of what happens in the market.
As someone who believes in long-term investments, Warren Buffett holds on rather than panicking and abandoning what he thinks are good businesses for less than what he thinks they’re worth.
Many investors get nervous because of volatile markets. In contrast, billionaire Buffett sometimes uses them as an opportunity to buy.
Preparing to crash, whenever it comes
I try to do the same.
Sooner or later, there will be another stock market crash – and it may cause a sell-off.
But no one knows for sure when that will happen. Such buying opportunities may be temporary.
So it pays to be prepared. My approach is to keep a list of top quality businesses that I would like to invest in – if I can do that at an attractive price.
One on my list Nvidia (NASDAQ: NVDA).
When the next crash comes, I think there’s a good chance that big companies exposed to AI will be hit hard given how much their share prices have risen in recent years.
At the right price, that might bring me a buying opportunity.
The key risk here is that the demand for AI will diminish. Another risk is that the price of the chip will drop as competitors offer chips that are not as good, but cheaper. That could hurt Nvidia’s profit margins.
But even if the demand for AI falls I don’t expect it to disappear. Additionally, before AI, Nvidia already had a large business producing chips for other applications such as gaming. I expect that to continue.
Warren Buffett likes companies that have a ‘moat’ or competitive advantage. Nvidia’s proprietary designs provide that.
