Last year, Nasdaq stocks -- from Nvidia to Palantir Technologies -- pumped up the performance of many portfolios. Investors piled into these high-growth names, and the fact that these players are involved in the booming artificial intelligence industry made their stories even brighter. The index finished the year with a double-digit gain, following a double-digit increase in 2023, and the momentum continued into the early days of this year.
But in recent weeks, the Nasdaq has lost its glow -- at least for now. The benchmark slipped into correction territory, falling more than 10% from its latest high back in December, amid concerns about the impact that President Donald Trump's tariffs on imports may have on the economy. Though the Federal Reserve said last week that it might cut rates twice this year, the central bank also expects higher inflation, and Chair Jerome Powell says that expectation is linked to the tariffs.
Against this backdrop, you may be wondering whether now is the right time to invest. In these sorts of situations, it's a great idea to turn to the wisdom of someone who has experienced the ups and downs of the stock market and scored a win over the long term. I'm talking about billionaire investor Warren Buffett. Should you buy stocks in the Nasdaq correction? Six words from Buffett offer a strikingly clear answer.
Image source: The Motley Fool.
Buffett's successes and strategy
So, first, a quick note about Buffett's successes and strategy. At the helm of Berkshire Hathaway, he's helped deliver a compounded annual gain of nearly 20% from 1965 through the end of last year. That's compared to the S&P 500's increase of about 10%. That kind of outperformance demonstrates the billionaire's knowledge of the market, meaning we might reap rewards if we follow his advice.
As for strategy, Buffett doesn't rush to get in on trends. In fact, he doesn't particularly like them and instead aims to buy quality companies with staying power at reasonable or bargain prices. For example, he's held players like Coca-Cola and American Express for years, and in his 2023 shareholder letter, he wrote that he didn't plan on letting them go any time soon.
Last year, with indexes galloping higher, Buffett wasn't a big buyer of stocks. In fact, he was a net seller to the tune of $134 billion, and that helped Berkshire Hathaway build up a record cash level of $334 billion. Buffett even made a shocking move, selling his entire positions in two index funds that track the S&P 500: the SPDR S&P 500 ETF Trust and the Vanguard S&P 500 ETF. Historically, Buffett has been a fan of these investments and has even set out a plan for most of his cash, upon his death, to go into an S&P 500 index fund for the benefit of his wife.
Of course, those moves by Buffett happened late last year, when indexes were soaring. We don't yet know what the billionaire has been doing in recent weeks.
When to be greedy
Now, let's return to our question: Does Buffett recommend buying stocks during the Nasdaq correction? In a shareholder letter many years ago, he offered a clue in the form of six words. He and his team, he wrote, aim to be "greedy only when others are fearful." This suggests that Buffett isn't afraid of buying stocks as others run in the opposite direction at a time, such as now, when a benchmark is in correction territory.
Why? Because this is the moment when many quality stocks have seen their valuations drop. Buffett, being a value investor, knows that in these sorts of environments, it's easier to find bargains on solid companies that will go on to recover and grow over time.
Are stocks cheap?
It's important to remember, though, that this doesn't mean every stock is a great deal. Even though valuations have come down, as a whole, the market remains expensive. For example, a look at the S&P 500 Shiller CAPE (cyclically adjusted price-to-earnings) ratio, an inflation-adjusted measure of stock price in relation to earnings, has come down from a high of more than 37. However, it remains at 35, much higher than the average over time.
S&P 500 Shiller CAPE Ratio data by YCharts. CAPE Ratio = cyclically adjusted price-to-earnings ratio.
This means it's key to select stocks on a case-by-case basis and closely consider the following questions: Will the company be greatly impacted by potential economic headwinds, and if so, does it have the financial strength to manage the situation? Do today's challenges change the company's long-term growth story? Answers to these questions should help you make the right investment decisions during the stock market correction.
So, though the market may not look very tempting right now, it's actually ripe with fantastic deals on companies that have proven their earnings strength and have the ability to continue excelling over the long run. That's why, during this Nasdaq correction, it's time to follow Buffett's advice and be "greedy" as others flee the market.
