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The Nasdaq Composite plunged 5.5% on Thursday, closing in correction territory, defined as a decline of 10% or more from a recent closing high. Fears of a crackdown on data centers sent tech stocks spiraling after Texas elected a new governor, Gina Hinojosa, who had promised a temporary moratorium on data centers until new rules can be applied to them to ensure that they are not extractive. A full-on backlash against data centers seems unlikely, and there's always the possibility that they could move to neighboring states or even outside the country.
AI demand is strong enough that new capacity will be created somewhere. Thursday's crash was also a gut check for investors, and a reminder that sentiment can change quickly. AI stocks have skyrocketed this year, after all, and a number of them have doubled or better, even after Thursday's retreat.
Much of those gains were driven by sentiment, so they are easily given back once that reverses. For investors looking for some counsel at a time like this, the words of Warren Buffett are always a good source and a reminder to take a long-term view. In fact, not long ago, Buffett offered three words of advice that seem appropriate now.
Image source: Getty Images. This is nothing Market corrections happen on average about every 18 months. In other words, they are a normal part of the investment cycle, and investors should be prepared for them.
Back in March, after the U.S. had launched the war in Iran, the S&P 500 was approaching a correction, and longtime Berkshire Hathaway CEO Warren Buffet t was asked about it on CNBC. "Three times since I've taken over Berkshire, it's gone down more than 50%," he replied. "This is nothing." Buffett was sitting on a pile of cash at the time, as Berkshire still is, and his comment implied that the sell-off wasn't enough to start deploying that capital.
Buffett's words turned out to be prescient as the market soon bounced back, ripping higher and, in less than a month, was back at all-time highs. No reason to panic Buffett's advice is a reminder that while it may be painful to lose 5% of your portfolio in a single session, it's not a reason to panic. A 5% pullback in a single day is severe, but pullbacks are a normal part of investing, and making emotional decisions is the wrong move.
The stock market is also unpredictable in the short term, and Buffett's comment preceding a huge rally is a reminder that stocks could bounce off of Thursday's sell-off in the coming days or weeks. There's another Warren Buffett expression that seems appropriate at the moment as well. Buffett famously counseled: "Be greedy when others are fearful, and fearful when others are greedy.
Thursday's sell-off looks like a lot of fear driven by the data center issue, which comes on the heels of concerns about high interest rates and large capital expenditures, which had also driven the sector lower. It's worth remembering that despite concerns about a bubble, the tech stocks at the center of the AI boom continue to deliver strong results on the top and bottom lines, and valuations still look very reasonable. Nvidia now trades at a price-to-earnings ratio of less than 23, and Meta Platforms trades at a P/E of just 20.
These stocks look oversold and undervalued, and there are others like them. The current pullback might not be a steep enough sell-off to intrigue Buffett, but those are great prices to pay for high-quality stocks. Investors should keep their focus on the long term and take advantage of dips on top stocks.
Source: The Motley Fool
