Is It Really Smart to Buy Stocks Right Now? Here’s Warren Buffett’s Best Advice.
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Is It Really Smart to Buy Stocks Right Now? Here’s Warren Buffett’s Best Advice.
010 mins
There’s no getting around it: The market looks expensive on several metrics. The broader benchmark S&P 500 (SNPINDEX: ^GSPC) is now up over 102% since the start of 2023 despite some pretty glaring warning signs. In recent years, investors have breezed past the longest inverted yield curve in history, a banking crisis, elevated inflation, and the Iran war.
Is it really smart to buy stocks right now? Here’s Warren Buffett’s advice.
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Buffett is worried about the market
As I mentioned, it’s hard to dispute that the S&P 500 looks expensive right now.
The Buffett indicator, which is named after Buffett, who has called it “probably the best single measure of where valuations stand at any given moment,” is at an all-time high of 238%. The Buffett indicator compares the total value of the stock market, as measured by the Wilshire 5000, to U.S. gross domestic product. Buffett has previously said that the Buffett indicator looks expensive at 100%, although it hasn’t been below that level since 2013.
Furthermore, the Shiller CAPE ratio, which looks at the value of the S&P 500 relative to its average 10-year, inflation-adjusted earnings, is nearly as expensive as it was right before the dot-com bubble burst in 2000.
What’s even scarier to some investors is that the current artificial intelligence (AI) cycle bears similarities to the internet-fueled dot-com bubble because, in both cases, companies were spending hundreds of billions on capital expenditures. Between 2025 and 2026, the “Magnificent Seven” companies are likely to spend well over $1 trillion.
Buffett, who is no longer CEO of Berkshire Hathaway, has even said he is concerned about the market. “So we’ve never had people in a more gambling mood than now,” Buffett told CNBC back in May. “But that doesn’t mean that investing is terrible. It does mean that prices for an awful lot of things will look very silly.”
Buffett’s advice
While Buffett may have concerns about investor behavior right now and an expensive market, that doesn’t mean he would advise moving into cash even if Berkshire had built a nearly $400 billion cash pile until the second quarter of the year when the large conglomerate began putting money to work.
Buffett has always given investors two great pieces of advice, both of which concern how to evaluate stocks before buying them. The first is about long-term investing.
“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes,” Buffett wrote in a letter to shareholders in 1996. “Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”
Too often, investors have looked to make gains overnight. But that’s very risky because nobody knows what will happen in the near term. How many big swings have we seen AI stocks make this year alone?
This kind of get-rich-quick gambling behavior could lead investors to buy stocks at high prices and sell at low prices, resulting in significant losses. Buffett has said many times that one doesn’t need to be that smart to take advantage of the power of time and compounding.
Buffett’s second piece of advice has been to buy wonderful companies at fair prices, a lesson he learned from his right-hand man, Charlie Munger, the former vice chair of Berkshire Hathaway, who died in 2023. While many investors try to buy deep-value plays or high-growth stocks, Buffett believes it isn’t necessary. These examples are littered throughout Berkshire’s portfolio.
Take Coca-Cola, one of Berkshire’s largest positions, which the company began buying in the 1980s. Coca-Cola isn’t necessarily a fast-growing AI stock, but it has grown earnings for decades, increased its dividend for decades, developed one of the strongest brands in the world, and has become one of the premier consumer staples stocks that can execute across the business cycle.
Or how about Berkshire’s recent purchase of Alphabet, which Buffett initiated last year. Berkshire has not bought Alphabet at the most attractive levels, but the Berkshire team likely sees Alphabet continuing to perform well for years to come, leading them to believe that today’s prices will not be unreasonable five or 10 years from now.
Investors should heed Buffett’s advice. Find stocks that you can own for 10 years and that you are paying a reasonable price for what the earnings could be down the line. Trying to get rich overnight is a fool’s errand.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Berkshire Hathaway. The Motley Fool has a disclosure policy.
