Image source: The Motley Fool
One of the questions that has plagued the stock market over the past few months is whether we might be in an AI-fueled stock bubble – and when it might burst. As someone who has lived through many bubbles over the decades, I think 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 a pile of cash in points, leading some to speculate that he is trying to wait out a major market downturn to capitalize. But he’s smart enough to know that no one can time the market with absolute confidence – and he’s not trying to.
Instead, his approach was to buy individual stocks when he thought they were attractively priced, hold them for a long time, and then occasionally sell them.
That may look like timing the market because it involves buying stocks at a low price. Generally, a good time 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 didn’t pile into dotcom stocks and then hope to cash out big profits before the market hit a high, for example.
Sticking to what you know and understand
In fact, Buffett didn’t bother to buy any dotcom stocks at all in the heyday of that era’s turnaround. And he didn’t buy AI’s leading shares before he stepped down as CEO Berkshire Hathaway earlier this year.
There’s a simple reason, even before getting into the math. Buffett likes to stick to what he understands. He has long expressed the belief that he did not have the necessary knowledge to judge whether technology companies had the kinds of business characteristics he wanted.
Only years later he invested IBM again an apple.
A moat like Buffett
One technical contribution that he and his colleague Charlie Munger think we missed Alphabets (NASDAQ: GOOG) (NASDAQ: GOOGL).
The reason was that, in this case, they felt they had information about Google and failed to act on it. Berkshire has a business that already broadcasts ads to buy a lot of money from Google, so Buffett and Munger could put two and two together to see the broader potential of Google’s business.
Alphabet has several characteristics that Buffett likes about stocks and one of them is its ‘moat’. This is how Bhe describes the competitive advantage that keeps competitors out.
Google’s moat includes its large volume of user data, proprietary technology and a proven model for monetizing not only search but other properties such as YouTube again.
AI is a threat to Google’s search dominance. It may lead to less search and thus less advertising revenue. But it could also present an opportunity for Alphabet, given the company’s vast amounts of structured data that could help it leverage AI itself.
Alphabet has a large customer base and has proven to make more money over time (although the cost of AI may reduce that).
But, like Buffett, I like to buy good businesses at attractive prices. Alphabet’s current stock price is too high for my taste, so I won’t invest.
