Buffett's Perspective on Short-Term Volatility
"Stocks Are Very Unsafe for Tomorrow": Warren Buffett's Warning on Short-Term Risks
What Warren Buffett Thinks of Your Stocks?
What’s the biggest risk investors face in the stock market? Depending on who you ask, answers can vary from geopolitical conflicts to consumer sentiment or even interest rates. However, according to Warren Buffett, the biggest risk is relatively simple: short-term thinking.
Buffett's Perspective on Short-Term Volatility
Buffett's philosophy was heavily influenced by Benjamin Graham, his mentor at Columbia University. Graham famously explained that market dynamics look entirely different based on the time horizon. Buffett reiterated this in his 1993 letter to Berkshire Hathaway shareholders, stating:
“In the short-run, the market is a voting machine — reflecting a voter-registration test that requires only money, not intelligence or emotional stability — but in the long-run, the market is a weighing machine.”
In simpler terms, the stock price you see today or even tomorrow is less likely to be based on facts and more likely to be influenced by investor sentiments at that moment. This sentiment-driven short-term volatility can be unpredictable.
Researchers have found a correlation between social media discussions of a stock and its short-term performance. A study published in the International Review of Financial Analysis found that increased social media chatter can influence not only the price but also the volatility of a stock in the short-term. This unpredictability makes short-term prices and volatility difficult to forecast.
“If you think you can jump in and out or that you know the time to come in, I think you’re making a mistake,” Buffett said in his 2017 CNBC interview. Instead, he prefers to tune out the noise and focus on the long-term prospects of the underlying business.
Long-Term Prospects
Buffett rarely makes short-term predictions but has been remarkably candid and confident in his long-term thesis. “American business is going to be worth more over time,” he said. “Are [American businesses] going to be worth more 10, 20, or 30 years from now? Of course they are.”
This isn't the first time Buffett has made an aggressive long-term prediction. In 2008, at the height of the financial crisis, he wrote an opinion piece for the New York Times to assuage concerns about the American economy. “These businesses will indeed suffer earnings hiccups, as they always have,” he wrote. “But most major companies will be setting new profit records 5, 10, and 20 years from now.” Similarly, in 2017, he predicted that the Dow Jones Industrial Average would be "over 1 million" in 100 years.
Buffett isn’t the only successful entrepreneur making long-term predictions with confidence. Jeff Bezos has constructed a 10,000-year mechanical clock in West Texas as a symbol of the power of long-term thinking. “Long-term thinking is a lever. It lets you do things that you could not do or couldn't even conceive of doing if you were thinking short term,” Bezos said.
Leveraging Long-Term Trends
Retail investors can leverage long-term trends by ignoring short-term noise and focusing on the prospects of individual businesses and the long-term outlook for specific industries. For example, Deloitte expects generative artificial intelligence (AI) to represent half the value of all semiconductors sold by 2027. Meanwhile, S&P Global forecasts $700 billion per year of renewable energy investment by 2050, and Morgan Stanley expects America’s aging population to drive up healthcare costs over the next few decades.
Investors who focus on these long-term trends could benefit from tailwinds that make short-term concerns irrelevant.
Conclusion
Warren Buffett's advice to avoid short-term thinking and focus on long-term prospects remains valuable for investors. While the stock market may seem unpredictable in the short term due to various factors like social media influence and market sentiment, the long-term growth potential of strong businesses and emerging industries can offer substantial rewards. By following Buffett's approach, investors can navigate market volatility and capitalize on the enduring value of their investments.