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One of the most memorable stock market events this year has been the listing of Space Exploration Technologies (NASDAQ: SPCX). While shooting for the stars is something that billionaire investor Warren Buffett has long done in financial terms, he has never been seen as much of a tech investor.
Yet I am leaning on Buffett’s accumulated investing wisdom when it comes to my own thought process about whether to buy SpaceX stock for my portfolio. Why?
A share is a stake in a business, not just a piece of paper
Hot stocks like SpaceX often attract speculators and traders who want to buy the share and sell it on fast for a profit.
They look at a chart and decide that the share seems to be going up – SpaceX stock has soared 39% since the first week of last month – and conclude that it will keep doing so, allowing them to jump in and out for a quick profit.
Buffett is far too savvy an investor to believe that past performance necessarily gives an indication of what to expect in future. He is also not a short-term trader. His approach to long-term investing is one I try to apply in my own investing.
But there is another crucial element to Buffett’s investing ethos that is helping inform my approach to SpaceX stock – and it is one that he only developed over time. Instead of looking at a share as a piece of paper with a number attached, as he sometimes did early in his career, he views it as a stake in a business.
Why Buffett’s analytical approach is helpful
That might sound like an abstract way of thinking about whether or not to buy a share. But in fact, I find it very helpful as it allows me to view SpaceX in a different way.
For example, would I stump up hard-earned cash for a business I do not understand? No. Buffett emphasises the importance of staying inside your ‘circle of competence’ as an investor.
Fortunately, while I do not fully understand all of its operations, I feel I have enough of a grasp of the business to make a decision on how attractive it is.
What about putting money into a lossmaking business that is spending billions of pounds per quarter on capital expenditure and may take years to break into profitability, if it ever does?
I’m staying on the sidelines for now
That description applies right now – and it puts me off investing. Arguably, buying even one share in SpaceX at the current price would not be just buying a stake in the business, but also buying a stake in a group expectation about what that business might ultimately become.
With its technological prowess, patents, talented team and rapid growth, SpaceX could potentially grow and become profitable, to the point that today’s valuation seems like a bargain, in retrospect.
But it might well not. The competitive landscape includes well-funded rivals and some parts of SpaceX like its AI operations risk soaking up billions of pounds without a clear path to profitability.
Instead of investing, I am applying the same Buffett approach to finding more attractive shares to buy for my portfolio – including growth stocks.
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Christopher Ruane does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
