The Stock Market Is Cultivating Gamblers and Not Investors, According to Warren Buffett. What That Means for Anyone Considering Buying Into Flashy IPOs.

In a July interview with CNBC, former Berkshire Hathaway CEO Warren Buffett warned that investors are increasingly turning into gamblers. "It's tough to find values when everybody is preferring gambling," he said. He added, "But since humans love to gamble so much, there's more money in, in actually cultivating gamblers than there are cultivating investors."

The type of behavior the Oracle of Omaha is talking about, like making excessively risky "bets" in hopes of achieving massive one-time windfalls, can be found across the stock market. But it can be especially abundant with initial public offerings (IPOs). And with a few potential big-name companies, like Anthropic and OpenAI, potentially going public over the next year, some may get lured into a gambling mindset.

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The allure of IPO investing

IPOs offer excitement, as they create the first opportunity for most retail investors to directly own shares of a company that has been private for years or even decades. With that excitement, however, the fear of missing out starts to creep in for some, leading many investors to buy shares of a company they don't understand. They may then expect that one trade, like going all in at a poker table, could bring them instant wealth, which is what turns people from investors into gamblers.

Instead of experiencing a quick windfall, however, IPOs are known for volatile price swings that could quickly turn an investment into paper losses. Just look at Space Exploration Technologies (NASDAQ: SPCX). When SpaceX began trading to the public on June 12, it closed at $160.95 per share. By June 16, shares shot up all the way to $225.64, but it has been a sharp reversal since then; SpaceX opened at $107.08 on Aug. 6.

For anyone who bought in when it was trading at $225.64, from that Aug. 6 opening price of $107.08, the stock price was down 52.5%. That sell-off may be overdone over the long term. But during that downward price swing, a lot of people who were just hoping for a quick gain may have instead sold their SpaceX stock at a loss.

Building wealth over time

Two of the biggest companies in terms of the attention they could generate if they go public over the next year are artificial intelligence (AI) competitors Anthropic and OpenAI. Ultimately, investing in those companies could make their shareholders money, with the global AI market expected to grow from $189 billion in 2023 to $4.8 trillion by 2033.

That said, just as with SpaceX, anyone thinking of becoming a shareholder will have to be prepared for price swings and willing to hold the stock through volatile periods to reap any rewards. Treating investing in those stocks like a short-term gambling move, meanwhile, could lead to fast losses.

As Buffett said in his 1996 letter to shareholders, "If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes."

Jack Delaney has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.