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

The S&P 500 index has climbed significantly over the past two years, with growth stocks drawing in investors as they anticipate these companies' continued success in a climate of lower interest rates. Growth companies typically perform well when they can borrow easily, allowing them to invest in their development and expansion. Furthermore, favorable economic conditions enable consumers to spend more on these companies' offerings.

In a rising market, many feel inclined to buy and hold growth stocks, and the impressive gains observed in the last couple of years support this strategy. However, this surge has led to higher valuations, raising questions about the wisdom of investing in stocks at current levels.

As stock prices have escalated, valuations have also increased, reaching unprecedented levels. This situation begs the question of whether now is a good time to buy stocks. To shed light on this issue, let’s take a look at what renowned investor Warren Buffett is doing.

Buffett's Approach to Long-Term Investing and Value

Many investors turn to Buffett for insight because of his long-standing record of understanding the stock market. His leadership at Berkshire Hathaway has resulted in nearly 20% compounded annual growth over nearly six decades, outpacing the S&P 500's approximate 10% return. This success can be attributed to Buffett's focus on investing in industries and companies he comprehends, taking a long-term perspective, and waiting for reasonable stock prices before buying.

Buffett is widely recognized as a value investor, which means he looks to purchase stocks when they are undervalued compared to their intrinsic worth. The goal is for the broader market to eventually recognize these companies' potential, leading to a rise in stock prices and profits for those who invested wisely.

Right now, the market's status is worth noting. As previously mentioned, the S&P 500 has grown, but this ascent has been accompanied by higher valuations. A useful indicator is the S&P 500 Shiller CAPE (cyclically adjusted price-to-earnings) ratio, which evaluates stock prices relative to earnings over a decade to factor in economic fluctuations. Currently, the CAPE ratio has exceeded 37—a level it has only surpassed twice since the S&P 500 began tracking in the late 1950s—suggesting that stocks are quite pricey.

Current Market Conditions

Looking at Buffett's actions, last year he was not in the market as a buyer. In fact, he was a net seller, offloading stocks worth $134 billion from his portfolio. This included significant reductions in holdings of major companies like Apple and Bank of America, where he decreased his position by 67% and 34%, respectively. This led to Berkshire Hathaway accumulating a historic cash reserve exceeding $334 billion.

In his recent letter to shareholders, Buffett noted, "Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities." This indicates that he was not seeing attractive investment opportunities last year, aligning with his value-investing philosophy. Given the current market conditions, it appears he is not aggressively purchasing stocks either.

Taking Cues from Buffett's Strategy

So, should investors follow Buffett's example and refrain from buying stocks currently? Not necessarily. Just because he is cautious doesn't imply he has ceased investing altogether. He continues to monitor market developments and is making selective purchases. For instance, in the last quarter, he initiated a new stake in Constellation Brands and significantly increased his investment in Domino's Pizza by over 86%. Both of these companies are now trading at lower valuation levels than they were a year prior.

This indicates that despite the overall market being expensive, there are still viable investment opportunities. Like Buffett, one might not be purchasing stocks en masse due to current high valuations, but that doesn't mean one should stop investing entirely. Avoiding the stock market could mean missing out on potential wealth-building investments.

While Buffett remains cautious, he continuously seeks opportunities in stocks. He emphasized in his recent shareholder letter that even amid a considerable cash position, the majority of his assets remain in equities. His preference for stocks is unlikely to change.

In any market condition, Buffett's strategy is to seek out stocks to buy and hold for the long term. This disciplined approach has historically led to success and may provide valuable lessons for investors aiming for long-term growth as well.

Stocks, Investing, Buffett