Buffett Drops A Sobering Reality For Investors Today

When Warren Buffett speaks, it’s a good idea to listen.

Since he took control of Berkshire Hathaway in 1965, the billionaire helped deliver a 19.8% compound annual growth rate, which outperforms the 10.2% returns on the S&P 500. Also, every $10,000 invested in Berkshire in 1965, you’d be sitting on $550.2 million at the end of 2024, as compared to “just” $3.92 million from the S&P 500.

Key Points About This Article 

• Since he took control of Berkshire Hathaway in 1965, Buffett helped deliver a 19.8% compound annual growth rate, which outperforms the 10.2% returns on the S&P 500.
• It’s what he said in a recent shareholder letter that has us concerned.
• Is your portfolio heavily weighted to overbought technology stocks? Maybe it is time to sit with a financial advisor near you for an asset review. Click here to get started. (Sponsored)

We know Warren Buffett is a market optimist.

But it’s what he said in a recent shareholder letter that has us concerned.

“Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities,” he said in his 2024 letter.

What he’s saying is that even he’s struggling to find value in our current pricey market.  For one, Berkshire Hathaway was a net seller of stocks in 2024. As I noted on March 13, “In years where Berkshire has been a net seller, we’ve seen below-average years follow. With the firm a net seller of $134 billion in 2024, we can assume 2025 could be below average, too.”

“The S&P 500 returned a total return of 141% in years when Berkshire was a net buyer in the preceding year. The index returned about 93% when Berkshire was a net seller in the preceding year. And while we’d need a crystal ball to tell you what could happen in 2025 (ours is in the shop for repair), Buffett’s actions and their history tell us 2025 could be below average.”

Even the Case Shiller Price to Earnings Ratio is Overvalued

Another reason Buffett may not see a good deal of value in markets right now is because of a stretched Case Shiller P/E ratio, which now stands at 34.47, as compared to its average of 17.22. It’s low was 4.78 in 1920. Its high was 44.10 in 1999. At 34.47, the ratio is now at its third-highest point in its 154-year history. Unfortunately, readings above 30 have typically been followed by a pullback of an average 20% in the S&P 500.

So, what’s the best way to deal with the market right now?

One, buy the fear.

Sir John Templeton would tell investors to buy excessive pessimism.

Warren Buffett still advises that a “climate of fear is your friend when investing; a euphoric world is your enemy.”  And of course, we all remember his advice to “be fearful when others are greedy and greedy when others are fearful.”

Baron Rothschild would tell investors, “The time to buy is when there’s blood in the streets, even if the blood is your own.”  He knew that very well, considering he made a small fortune buying the panic that followed the Battle of Waterloo against Napoleon.

If you can spot fear, as they did, you stand to make a fortune.

Also, in times of chaos, have cash on hand.

“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent,” says Warren Buffett.

Never Follow the Herd 

One of the key reasons that many investors underperform in the market is because they move in and out of assets at the wrong time.  

When an investor sees everyone else making money from rising markets, that’s when they tend to throw every spare dollar into their investments. Unfortunately, when that same investor sees a group of other investors selling, the investor sells, too.

In short, they get caught up in herd mentality.

A trader will often mimic the actions of a larger group so they don’t feel left out of a trend, or miss what the herd believes is a “can’t lose” trade.

The rationale is simple.

It’s unlikely that such a large group of people can be so wrong. But unfortunately, they often are.

Be in a Strong Position to Capitalize 

With cash on hand, Buffett has the financial flexibility to jump on opportunities that popped up. As the billionaire often points out, keeping some cash on hand allows you to take advantage of corrections without having to sell other investments.

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