Investors always stop and take notice when Warren Buffett speaks about the stock market. There's one simple reason for this: The billionaire, who guided Berkshire Hathaway's investment decisions for 60 years, over that time delivered market-beating returns. While the S&P 500 posted a compounded annual gain of about 10%, Berkshire Hathaway's return topped 19%.
So Buffett has proven a clear understanding of the market and the ability to make wise long-term investing decisions -- even during tough times.
Today, Buffett no longer holds the chief executive officer role at Berkshire Hathaway -- he turned that over to Greg Abel at the start of this year – but the investing giant remains chairman of the holding company and still is involved to some degree in the investing process. This past weekend, for the first time, Buffett didn't take a spot on the stage at the Berkshire Hathaway annual meeting -- but he did claim a seat in the front row of the directors' section.
And during this major event, the investing giant delivered a fresh warning to Wall Street. Let's consider what it means for you as an investor.
Image source: The Motley Fool.
Buffett's recent moves
First, it's important to consider the investing backdrop today as well as Buffett's moves over the past several quarters. The S&P 500 pushed higher in the bull market over three years, delivering a 78% increase through the end of December. And the star of the show has been the artificial intelligence (AI) stock. Investors have poured into AI companies, with great optimism about the technology's potential to overhaul how many tasks are done.
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Key Data Points
AI has the power to help companies become more productive and innovative -- and this should boost the earnings performance of these users of AI. The developers and sellers of AI are already benefiting, bringing in billions of dollars in revenue and profit. This helped technology stocks to soar, driving this bull market.
Against this backdrop, Buffett hasn't been a major buyer of stocks -- in fact, he's been a net seller for more than a dozen quarters. And he's helped Berkshire Hathaway build up a record pile of cash. This might have been seen as a warning, suggesting that it may not be the best time to rush into stocks.
BRK.B Cash and Short Term Investments (Quarterly) data by YCharts
And what happened next? Earlier this year, headwinds emerged in the market -- from geopolitical and economic uncertainties to worries about the AI revenue opportunity -- and this weighed on many growth players and the major benchmarks in the first quarter. But the positive momentum returned in April. Investors regained optimism about the long-term picture amid the ceasefire in Iran and positive earnings reports from tech giants.
Buffett's latest warning
Now, as indexes resume this positive direction, let's return to Buffett and his latest comments on the investing environment. In an interview with CNBC at the Berkshire Hathaway annual meeting, he delivered a fresh warning:
"We've never had people in a more gambling mood than now," he said during the interview. "But that doesn't mean that investing is terrible. It does mean that prices for an awful lot of things will look very silly."
One powerful metric supports Buffett's comment, and that's the S&P 500 Shiller CAPE ratio, an inflation-adjusted look at stock price in relation to earnings per share. Earlier this year, it reached a level it's only reached once before in history -- during the dot-com bubble -- and it remains close to this record level today. This shows that stocks, overall, are historically expensive.
S&P 500 Shiller CAPE Ratio data by YCharts
Here's what Buffett knows
So, does Buffett know something Wall Street doesn't? Well, while some individuals are focusing on short-term trading, Buffett recognizes that buying stocks at excessively high valuations generally isn't the best move for the long-term investor.
Considering this, should you really buy stocks now? And this brings us back to Buffett's actions in recent quarters. As mentioned, Berkshire Hathaway hasn't heavily invested in stocks -- but this doesn't mean it has stayed out of the market. Buffett and Abel, in any market environment, are still on the lookout for specific buying opportunities.
For example, in the fourth quarter of last year, Buffett opened a position in The New York Times and added to his position in Domino's Pizza.
So, yes, Buffett is delivering a fresh warning, and it's this: Don't rush into stocks at any price. It's important to be selective and pick up players trading at reasonable levels -- and in the current market, opportunities may not be around every corner. But as Buffett demonstrated through his recent purchases, investors might find entry points during any market environment. He even noted, as mentioned above, that investing today isn't exactly "terrible." And that's why, like Buffett, you can score a long-term win by investing wisely -- even during difficult markets.
