Warren Buffett has led Berkshire Hathaway to a stock market win over the past 59 years. As chairman, the billionaire investor has always aimed to buy quality stocks at reasonable or even cheap prices and hang on for the long term.
This strategy has proven its strength, as Berkshire Hathaway has delivered a compounded annual gain of nearly 20% over that time period -- far surpassing the S&P 500's (^GSPC 1.33%) 10% compounded increase.
But how exactly did Buffett get in on winning players at just the right time? He did it by going against the crowd, and he even explained this strategy in one of his letters to Berkshire Hathaway shareholders. Buffett and his team "attempt to be fearful when others are greedy, and to be greedy only when others are fearful," he wrote in the 1986 letter.
By this, Buffett means he won't be swayed by the allure of a soaring market and buy stocks -- even great companies -- at unreasonable levels. At the same time, difficult market environments don't scare Buffett, and they most often present the best buying opportunities.
Does this mean that today, during the market uncertainty, it's time to follow Buffett and "be greedy"? Here's what history says.
Image source: The Motley Fool.
Today's market situation
So, first, a quick summary of the current market situation. Major indexes have slipped since the start of the year, with the Nasdaq Composite (^IXIC 1.59%) even crashing earlier this month, amid concern about President Donald Trump's plan to impose tariffs on imports from countries worldwide. The idea is this will lift prices, hurting both the U.S. consumer and U.S. companies -- some economists and business leaders have said all of this could even lead to a recession.
These risks hit stocks hard, but certain positive signs have helped the indexes recoup some losses in recent weeks. For example, Trump paused his tariff plan for 90 days to negotiate tariff levels with various countries, a move that shows a willingness to be flexible.
Still, the overall economic and market environment remains uncertain because we don't yet know the exact level of the tariffs -- and therefore, how they will impact corporate earnings and the economy. So, while we have seen some relief in the market, indexes haven't yet shown lasting positive momentum.
Bargain valuations
One bright spot in such a difficult environment is the valuations of many top stocks have reached bargain levels. In fact, the S&P 500 Shiller CAPE ratio has fallen more than 12% since the start of the year to 33, its lowest in a year. This valuation measure is particularly interesting because it measures stock prices in relation to earnings over a 10-year period, smoothing out fluctuations caused by economic shifts.
Now, let's consider our question: In this setting, is now the best time to "be greedy" like Buffett and buy stocks? History shows us that after double-digit declines in the Shiller CAPE ratio and right after this measure reaches its low, the S&P 500 goes on to gain.
For example, we can zoom in and see this trend more closely in the chart, after the Shiller CAPE ratio dropped in 2022.
S&P 500 Shiller CAPE Ratio data by YCharts
And again in 2020:
S&P 500 Shiller CAPE Ratio data by YCharts
Is now the time to buy?
So, history shows us that after a significant decline in valuations, the S&P 500 always has gone on to deliver a gain that's spanned months or years.
Now, let's return to our question: Does this mean that right now is the very best time to get in on stocks?
It's important to note that we don't know if the S&P 500 Shiller CAPE ratio has reached its lowest point, or if it will decline further. And this means if we rely on history as a guide, the lasting S&P 500 rally may be happening now -- or we may have to wait a while longer. But one thing that history assures us is this period of gains will happen.
In an ideal world, the best time to buy a stock would be when it's reached its lowest valuation -- but in reality, that's impossible to predict. The good news, though, is you don't have to buy a stock at its very lowest to win over time. Buffett simply aims to buy stocks when they're reasonably priced, and if this scenario unfolds during a difficult market, he's not intimidated.
All this means that today's difficult market makes an excellent time to follow Buffett's advice and "be greedy" -- you may thank yourself and the billionaire investor several years down the road.
