Should You Really Buy Stocks With the Market at Record-High Valuations? Here's What Warren Buffett Is Doing

The S&P 500 has experienced impressive growth over the last two years, climbing by double-digit percentages as investors have shown a strong interest in growth stocks. This enthusiasm is largely due to favorable borrowing conditions brought about by lower interest rates, which have allowed these companies to invest in their expansion more easily. Additionally, as the economy improves, consumers generally have more disposable income to spend on the products and services offered by these growth-oriented businesses.

In a rising market, there are valid reasons to consider buying and holding growth stocks. While the returns over these past two years have been remarkable, this surge has also led to significantly higher stock valuations.

Currently, many stocks are selling at much higher prices than just a few years ago, reaching levels that have led some to question whether now is the right time to invest. To gain insight into this situation, we can look at the strategies of one of the most respected figures in the investment world, billionaire Warren Buffett.

Buffett's Focus on Long-Term Investing and Value

Many investors turn to Buffett for guidance because of his impressive track record in the stock market over decades. As chairman of Berkshire Hathaway, he has achieved a nearly 20% compounded annual growth rate over 59 years, significantly exceeding the 10% average gain of the S&P 500. Buffett has been successful by investing only in industries and companies he understands, holding investments for the long term, and buying stocks at reasonable prices.

Buffett is widely recognized as a value investor. This means he looks for stocks that are priced below their intrinsic value, believing that the market will eventually recognize the value of these companies and push their prices up. This strategy aims to deliver significant returns to those who invest at lower prices.

Currently, the market presents a challenging situation with rising valuations. The S&P 500 has seen continuous growth even as some market uncertainties have emerged, such as concerns over consumer spending patterns and potential tariffs on imports. Despite this rally, however, valuations have escalated.

An Expensive Market

To better understand stock valuations, one useful metric is the S&P 500 Shiller CAPE (cyclically adjusted price-to-earnings) ratio. This ratio analyzes stock prices and earnings over a period of 10 years to smooth out the effects of economic cycles. Right now, this measure has surpassed 37, a level reached only twice since the S&P 500 was established as an index in the late 1950s, indicating that stocks are quite expensive.

In response to this expensive market, Buffett’s actions have been noteworthy. Last year, rather than buying stocks, he actually sold a net total of $134 billion in stocks, including reducing his stakes in major holdings like Apple and Bank of America by 67% and 34%, respectively. This selling spree allowed Berkshire Hathaway to accumulate a record cash position of over $334 billion. In his letter to shareholders, Buffett remarked, "Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities."

This observation suggests that he did not see attractive investment opportunities last year. Given Buffett's focus on value, his current stance indicates he has not been actively purchasing stocks in this expensive market.

How to Follow in Buffett's Footsteps

If you're considering following Buffett's approach, does that mean you should avoid buying stocks altogether right now? Not necessarily. Just because Buffett hasn't found numerous opportunities doesn't mean he has stopped investing entirely. He is still closely monitoring the market and making selective purchases. For instance, in the last quarter, he initiated a new investment in Constellation Brands and increased his stake in Domino's Pizza by over 86%. Both of these companies are currently trading at more favorable valuations compared to their forward earnings estimates than they were a year ago.

This indicates that there are still good buying opportunities, even as many parts of the market remain costly. While you may not be in a rush to buy stocks due to high valuations, it doesn’t mean you should completely exit the market. Avoiding investments could cause you to miss opportunities that could lead to long-term financial success.

While Buffett remains cautious, he has never completely abandoned stock investments. Importantly, he noted in his recent shareholder letter that, "Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities. That preference won't change."

Regardless of the market conditions, Buffett continues to seek stocks worth buying and holding for the long term. This strategy has proven successful for him over the years and could also help others achieve their investment goals.

Stocks, Market, Investing