Warren Buffett has made it abundantly clear throughout his career that he doesn't care what Wall Street thinks. One great example: Unlike most huge companies, Berkshire Hathaway doesn't hold quarterly conference calls with analysts.
However, Wall Street might want to pay attention to what Buffett thinks. And what is the legendary investor thinking these days? He appears to be flashing a warning sign to Wall Street and anyone else who will take heed.
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Buffett's famous axiom
In Buffett's 1986 letter to Berkshire Hathaway shareholders, he wrote about two "super-contagious diseases" -- fear and greed. He compared fear and greed to epidemics that are unpredictable in timing, duration, and degree.
Buffett's analogy set the stage for what became of his most famous axioms: "[W]e simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." This statement lies at the heart of Buffett's contrarian investing style.
When Buffett wrote those words in early 1987 (the letter focused on Berkshire's operations in the previous year), the stock market was booming. He acknowledged this, stating, "As this is written, little fear is visible in Wall Street. Instead, euphoria prevails-and why not? What could be more exhilarating than to participate in a bull market in which the regards to owners of businesses become gloriously uncoupled from the plodding performances of the businesses themselves."
But Buffett added, "Unfortunately, however, stocks can't outperform businesses indefinitely." His statement looks prophetic in retrospect. Only a few months later, the S&P 500 plunged 33%.
Buffett seems fearful now
To be clear, Buffett did not claim to know in early 1987 that the stock market would crash soon. He even said in the letter to Berkshire shareholders, "[W]e have no idea-and never have had-whether the market is going to go up, down, or sideways in the near- or intermediate-term future."
I point that out because Buffett's flashing warning sign to Wall Street today isn't related to a dire proclamation that he's uttered. (He hasn't made any, to my knowledge.) However, the 94-year-old investor's actions speak louder than his words. Buffett seems fearful.
He has been a net seller of stocks for eight consecutive quarters. Buffett has built Berkshire's cash stockpile to more than $325 billion -- the largest level in the company's history by far. Perhaps most ominously, he didn't approve any stock buybacks for Berkshire in the third quarter. When Buffett isn't buying shares of Berkshire Hathaway, it's a pretty good sign that he doesn't have a warm-and-fuzzy feeling about the rest of the stock market.
Perhaps the most compelling reason to believe that Buffett is fearful now, though, is that many other investors appear to be greedy. The S&P 500 is near its all-time high. Valuations are at a premium with the average stock in the S&P trading at roughly 24 times forward earnings.
The "Buffett indicator" (the ratio of the market value of all U.S. companies to U.S. GDP) is around 200%. Buffett wrote in 2001, "If the ratio approaches 200% -- as it did in 1999 and a part of 2000 -- you are playing with fire."
Should you be fearful, too?
I'm reluctant to claim that all investors should be fearful right now. I'd prefer to say that investors probably should be cautious.
Buffett's statement in 1987 about euphoria prevailing could arguably just as easily apply today. Many stocks are priced for perfection. I suspect some investors are focusing too much on the potential positive effects of deregulation and tax cuts and too little on the potential negative effects of broad tariffs.
Like Buffett, though, I don't know how the stock market will perform over the near term. My guess (and it's only a guess) is that the S&P 500 will continue rising through at least part of 2025. But I still think caution is advisable.
So what does being cautious mean from a practical perspective? Perhaps most importantly, be highly selective about which stocks you buy. Pay close attention to valuation and growth prospects. Have cash on hand in case the market falls so you can buy great stocks at a discount. Consider reducing your positions in stocks for which you don't have a high conviction.
These are the exact steps Buffett is taking. And for what it's worth, his practice of being fearful when others are greedy and vice versa has paid off handsomely over the long run.
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Keith Speights has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
