Many investors might be experiencing stock market acrophobia these days. Acrophobia is the fear of heights. Stock market acrophobia is the fear that stock prices are reaching worrisome heights. This feeling is unsurprising considering the S&P 500 is now in the third year of a strong bull market and has delivered gains of 23% or more in two consecutive years.
Rich Dad Poor Dad author Robert Kiyosaki predicts the biggest stock market meltdown in history will happen soon. New York University professor emeritus Nouriel Roubini, who warned of a major housing correction and recession in 2006, expects resurging inflation and slower economic growth. This combination, known as stagflation, could set the stage for a significant stock market decline.
But at least one famous investor isn't in the doomsday camp -- Warren Buffett. Here's why Buffett isn't predicting a stock market crash in 2025.
Image source: The Motley Fool.
No, Buffett isn't bullish
Don't get the wrong idea: Just because Buffett isn't predicting a stock market crash this year doesn't mean he's bullish about stocks. Pretty much everything he's been doing indicates that he's instead relatively bearish.
Buffett has been a net seller of stocks for eight consecutive quarters. Berkshire Hathaway should disclose its portfolio transactions for the fourth quarter of 2024 within the next day or two. I expect Berkshire's regulatory filing will reveal that Buffett's net selling streak extended to nine consecutive quarters.
Another sign of Buffett's less-than-rosy outlook is Berkshire's cash stockpile. As of Sept. 30, 2024, the conglomerate had cash, cash equivalents, and short-term investments in U.S. Treasury bills totaling over $325 billion. That's the biggest cash position by far in Berkshire Hathaway's history.
BRK.A Cash and Short Term Investments (Quarterly) data by YCharts
We also shouldn't overlook the valuation metric bearing Buffett's name. The Buffett indicator measures the ratio of the total U.S. stock market capitalization to GDP. In 2001, Buffett wrote, "If the ratio approaches 200% -- as it did in 1999 and a part of 2000 -- you are playing with fire." This metric is now above 200% -- its highest level ever.
One simple explanation
With all of the evidence that Buffett is decidedly bearish about the stock market, why isn't he predicting a crash in 2025? There's one simple explanation: The legendary investor avoids making stock market predictions at all.
In his 1992 letter to Berkshire Hathaway shareholders, Buffett wrote:
We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie [Buffett's longtime business partner Charlie Munger, who died in 2023] and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.
He expressed a similar sentiment in his 2008 shareholder letter: "[N]either Charlie Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. (In our usual opinionated view, we don't think anyone else can either.)"
The same view came up in Buffett's 2022 letter to Berkshire shareholders as well. Buffett wrote that he and Munger "firmly believe that near-term economic and market forecasts are worse than useless."
Preparation beats prediction
When the stock market plunged in October 2008, The New York Times published an op-ed written by Buffett. The legendary investor stated, "Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month or a year from now."
But Buffett added something that every investor should consider, "What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over."
Buffett won't try to forecast a stock market downturn. However, he knows that if one occurs it will present a buying opportunity. And he wants to be ready if and when such an opportunity arises.
He's only buying high-conviction stocks that meet his stringent investing criteria. He has amassed a hefty cash stockpile that could be used to aggressively buy stocks if a market downturn makes valuations more attractive. Buffett's words and actions underscore an important lesson for all investors: Preparation beats prediction.
