Warren Buffett has been investing in stocks longer than I’ve been alive. Given that fact, he has seen various new technology cycles hit the stock market, with the resulting rush to buy related companies to try and profit from the advancements. With AI looking like a theme that will continue to drive markets in 2025, here are two pieces of advice I’m taking to heart on this topic.
Invest in what I understand
One of the famous quotes from Buffett is to “never invest in a business you cannot understand”. That’s one reason why some of his long-term holdings include the likes of Coca-Cola and American Express. Both these companies operate relatively straightforward business models. As a result, he’s able to easily grasp any strategy changes. From there, he can factor in his thoughts on what it could mean for company finances.
This applies to me when it comes to AI. I do get the premise of AI and the role that some companies play with hardware. However, there are some AI-related stocks where I don’t really see where the driving force for the use of the tech is coming from. Some software providers that are quite specialist in providing help for training models also go over my head.
On that basis, I’m trying to resist the urge to buy shares that are going up based on AI speculation simply due to fear of missing out (FOMO).
Focus on value, not hype
Buffett once said that “the stock market is designed to transfer money from the active to the patient”. Given that the sector is developing at such a rapid pace, there can be the temptation to be buying and selling day by day to try and capture profitable swings.
Instead, I want to try and imitate his advice by being patient. I’ll focus on allocating my money to established companies that should be AI winners in the long run. For example, I own shares in Tesla (NASDAQ:TSLA). The business released results earlier this week (29 January), showing that the push on robotaxis and other autonomous driving tech is really gathering pace. It expects to trial robotaxis in Austin, Texas, as early as June. More cities are due to follow by the end of the year.
I think the company is well set to make progress in this area, with it already having a strong base with existing electric vehicle design and production. Further, it has been involved in AI for some time already, meaning it will unlikely be a flash-in-the-pan. Over the past year, the growth stock is up 103%.
One risk is that management must keep a lid on costs. It’s fine to invest heavily in R&D but they need to ensure this doesn’t compromise profitability too much in the process.
By trying to apply the thoughts of Buffett, I feel it can make me a better investor. Especially with these new trends, I can try and keep my portfolio profitable!
