Buffett has applied this wisdom in at least three markets over 40 years.
The stock market has been on an incredible run since the S&P 500 (^GSPC 1.09%) hit the bottom of the prior bear market in Oct. 2022. Since then, the index has increased about 70% as of this writing. Many stocks have seen even greater returns in that 26-month period.
Most people think those returns are just the start of a strong bull market. In fact, 56.4% of consumers expect stock prices to increase over the next year, according to the most recent U.S. Consumer Confidence report from The Conference Board. While that might not sound like an overwhelming share of the population, it’s a record high number since the survey started gathering this data 37 years ago.
Stock values are influenced by two major factors — financial results and investor sentiment — and many companies driving the bull market have produced incredible financial results over the last two years. But smart investors can’t ignore that more people are optimistic about the future returns of the stock market than ever, which has driven prices higher.
Warren Buffett has some apt advice for the situation.
Image source: The Motley Fool.
Applying the same advice to three different markets
In Oct. 2008, the S&P 500 had already fallen 40% from its 2007 peak, and many investors thought things could only get worse. In an op-ed for The New York Times, Buffett wrote, “Fear is now widespread, gripping even seasoned investors.” Indeed, U.S. consumers had never been more pessimistic about the future of the stock market, according to The Conference Board’s survey.
Buffett was compelled to remind readers of the simple rule he laid out in Berkshire Hathaway‘s (BRK.A 1.37%) (BRK.B 0.86%) 1986 letter to shareholders. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
When Buffett wrote those words in 1987 (to recap Berkshire’s 1986 financial results), he noted, “Little fear is visible in Wall Street.” At the time, investors had bid up stock prices, and as a result, he couldn’t find any suitable equity investments for Berkshire’s portfolio. Instead, he piled about $700 million of Berkshire’s cash into Treasury bonds.
He wasn’t particularly thrilled about it, either. “At best, the bonds are mediocre investments,” he said. “They simply seemed the least objectionable alternative at the time.”
In 2008, he applied the same exact idea to the market with opposite results. He moved his personal portfolio from 100% government bonds to 100% U.S. equities. It proved an extremely fortuitous move for the Oracle of Omaha. The S&P 500 hit its bottom a few months after Buffett published his op-ed and went on to produce incredible returns over the next 15 years.
In 2024, Buffett again appears to be following his rule from almost 40 years ago. As prices have climbed over the past two years, Buffett has consistently sold off some of Berkshire’s biggest equity holdings. His selling accelerated in 2024 as investors became increasingly bullish, pushing Berkshire Hathaway’s cash and Treasury bill position to a record $325 billion as of the end of the third quarter.
When discussing the growing cash pile at the 2024 shareholder meeting in May, Buffett echoed his 1986 comments. “I don’t think anybody sitting at this table has any idea how to use it effectively, and therefore we don’t use it.” The alternatives to Treasury bills just aren’t very attractive to Buffett right now.
Is it time to get out of the stock market?
Once again, investors find themselves in a market environment where “little fear is visible in Wall Street.” Equity valuations have climbed to levels last seen during the dot-com bubble. Investors are more confident than ever that stock prices will be higher a year from now and are putting their money where their mouths are with record inflows into equity exchange-traded funds (ETFs) this year.
However, that doesn’t mean investors should sell all of their stocks and stash their money in government bonds. But it does require some careful consideration of their investments.
Another Buffett quote applies here: “The less the prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own.” Buffett wrote that in his 1988 shareholder letter. At the time, he was describing the market for arbitrage opportunities as excess capital had flooded the market, decreasing potential returns while increasing risk.
Buffett repeated himself in his 2017 shareholder letter, which he wrote at a time when investors were more confident than ever before in the future of the stock market. While the market did decline somewhat that year, it didn’t quite fall into bear market territory.
To be fearful doesn’t mean to run away from the stock market entirely. It means investors need to be more judicious than the rest of the crowd if they want to ensure solid returns.
Finding suitable investments for your portfolio will be more difficult as investor confidence has a tendency to bid stock prices up, making them less attractive. But Buffett’s recent portfolio moves suggest there are still plenty of investments that could produce great returns for shareholders if they know where to look.
Pay attention to what Buffett’s buying
While Buffett has been a big seller of stocks in 2024, he has made several relatively small purchases. Those purchases have one thing in common: They’re all near the smallest-sized companies Berkshire can invest in to move the needle for its massive portfolio.
But an individual could buy plenty for a relatively small portfolio. Buffett’s moves highlight the possibility that there may be more opportunities for individual investors in small- and mid-cap stocks than in large-cap stocks, including those represented by the S&P 500.
If you don’t want to take the time to search for great individual stocks, you could buy an index fund or two. The Vanguard Extended Market ETF (VXF 1.35%) offers a way to invest in the entire U.S. stock market excluding the S&P 500. Investors may also want to consider index funds focusing on value stocks as another option.
Nobody knows whether stocks will continue to move higher in 2025, but Buffett’s advice has proven very valuable for several decades at this point. It’s worth taking his words into consideration when planning your next moves as an investor.
