The markets have been volatile over the past few weeks as investors learn what tariffs really mean and experts warn about a new risk of a recession. The S&P 500 is slowly bouncing back from entering a correction last week, and it's still almost 8% off its recent highs. The Nasdaq Composite remains in correction territory, down about 12% from its highs.
Legendary investor Warren Buffett has been making moves for some time already that look like he's been anticipating this kind of event. Is this what he's been waiting for all along?
Greedy, fearful, bulls, and bears
Berkshire Hathaway (BRK.A +0.85%)(BRK.B +0.93%), Buffett's holding company, has been a net seller of stocks for the past nine quarters, and it ended 2024 with its largest-ever cash position at more than $334 billion.
Lots of people have been speculating about what it means. Buffett himself hasn't said anything to specifically address this, but there are some clear indications of what he's thinking.
First of all, it's been obvious that the market has been expensive. The average S&P 500 price-to-earnings ratio is nearly 29, or its highest in 10 years outside of the 2020 market rebound. Buffett doesn't like to overpay for his stocks, and he's cautious about markets that get too expensive.
Image source: The Motley Fool.
He's famous for saying that he's fearful when the market is greedy, and greedy when the market is fearful. To put it into greater context, he attached that sentiment to excessive bull markets.
"As this is written, little fear is visible in Wall Street," he wrote in his 1986 shareholder letter. "What could be more exhilarating than to participate in a bull market in which the rewards to owners of businesses become gloriously uncoupled from the plodding performances of the businesses themselves. Unfortunately, however, stocks can't outperform businesses indefinitely."
In other words, it's understood that prices will eventually fall to meet their real value. He called "fear" and "greed" two diseases, and said that he would "never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
NYSE: BRK.B
Key Data Points
Buffett's selling activity hasn't indicated that he sees a correction coming, because he knows he can't anticipate when that might happen. But it does indicate that he sees a greedy market, and he's been fearful.
Is this the moment you've been waiting for?
This could be the correction that Buffett knows is bound to happen at some point, although there's no way to know if it's going to keep going down or start to rebound. The S&P 500 has delivered gains of more than 20% for the past two years, which makes it unlikely that it's going to happen again in 2025.
The way the market stands right now, there are many stocks trading at attractive prices, and that could whet Buffett's appetite. In this year's shareholder letter, one thing Buffett did share about what he might be thinking right now is that "Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities."
We'll have to wait for the next quarterly report, for the 2025 first quarter, to see if Buffett and his team found some amazing buying opportunities in this correction. It's not a given that they did, because prices could still be going lower.
More than that, Buffett isn't looking for the cheapest stocks. Although he's a big fan of the undervalued stock, the value of the business is more important than the price. He's said that it's "better to buy a wonderful company at a fair price than a fair company at a wonderful price." So even though prices might look good right now, that doesn't mean much unless the price is backed up by a business that fits Buffett's model.
You, too, can use the market correction to scoop up shares of excellent stocks at attractive prices. Whether the market continues to slide or rebounds in the near term, in the long term, you'll be set up for investing success.
