After a year of record-breaking gains, major market indexes are wobbling. The S&P 500 (SNPINDEX: ^GSPC) has fallen by nearly 2% over the last week, as of this writing, while the tech-heavy Nasdaq Composite (NASDAQINDEX: ^IXIC) is down by more than 4% in that time.
Much of the sell-off is stemming from the tech sector, with artificial intelligence (AI) spending under the microscope. Rising bond yields have driven up borrowing costs, making it more expensive for AI hyperscalers to continue building data centers and related infrastructure. If big tech companies pull back on AI spending, it could cause a ripple effect across the broader market.
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At this point, it’s too soon to tell whether this volatility is a blip on the radar or the beginning of a deeper drawdown. Regardless of what’s coming, though, Warren Buffett has one tried-and-tested strategy that can set your portfolio up for success.
An industry’s potential has limits
In a 1999 essay for Fortune, Warren Buffett issued a warning to investors. The stock market was reaping the rewards of the dot-com boom, with the S&P 500 surging by nearly 200% over the previous four years, but Buffett predicted stock prices would fall.
He also emphasized that when an industry is poised to transform society, it’s especially important to choose your investments carefully. Buffett mentioned airlines as an example, noting that while air travel itself has had a monumental impact on our lives, 129 airlines had filed for bankruptcy over the previous 20 years.
Buffett’s 1999 warning eventually rang true, as the dot-com bubble officially popped in early 2000 — leading to a bear market that would last more than two years. Hundreds of tech stocks crashed and burned, despite the internet’s revolutionary impact on the world.
Buffett’s best advice for investors right now
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow,” Buffett said in the Fortune essay, “but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”
When the dot-com bubble burst, overvalued stocks crashed the hardest. These companies earned explosive returns when the bubble was building, but many had unsustainable business models, poorly managed finances, or inexperienced leadership teams that couldn’t navigate the bear market.
