How should i respond to my boss at work when he says what hes thinking?

you are overthinking this - which is normal since you are new to the working world. You really don't have to respond, but what you are doing is fine - also, smiling when he is telling stories you can relate to. If you are really worried about it, try to find some openings where you can ask a question or make a suggestion, but don't worry too much, take your clues from him, if he asks you direct questions always pay attention and try to respond well, but when he is talking to himself, let him get along with his conversation :)