Stock Investors Just Got a Massive Warning From Warren Buffett
Key Points
Warren Buffett aims to be fearful when others are greedy and greedy when others are fearful.
He says we're seeing something in the market we've never seen before.
Patient investors can still find opportunities.
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Warren Buffett has been dispensing investment advice for over 70 years. Some might say his annual letters to Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) shareholders are required reading for anyone interested in learning how to build and manage a stock portfolio.
While Buffett's no longer writing the annual letters for Berkshire (he left that duty to new CEO Greg Abel), he's still commenting on what he sees in the market. And in an interview at Berkshire Hathaway's shareholder meeting earlier this month, he provided a major warning for stock investors.
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What is Warren Buffett saying about the stock market right now?
Buffett is a strong proponent of judging investor sentiment when it comes to making smart decisions in the market. He described two "super-contagious diseases" in his 1986 letter to shareholders: fear and greed. They both cause markets to misprice securities. Stocks are generally overpriced when investors become greedy, and underpriced when they become too fearful.
In his recent interview, Buffett made it clear where he thinks the market sits today. "We've never had people in a more gambling mood than now," he said. Despite the geopolitical and economic uncertainty facing the country, investors have bid prices for many stocks to new all-time highs. The S&P 500 (SNPINDEX: ^GSPC) has climbed for six weeks straight as of this writing and sits near its all-time high. Fear is notably absent from the markets, and greed seems to have taken control.
Buffett is far from the only investor who sees current investor behavior as unsustainable. Another billionaire investor, Howard Marks, shared similar comments a few weeks earlier: "Every day, there's a tug-of-war in the market between the optimists and the pessimists. The optimists have basically been winning ... for the past 43 months."
But Buffett isn't entirely pessimistic on the market. "That doesn't mean that investing is terrible. It does mean that prices for an awful lot of things will look very silly," he added with regard to investors' gambling mood.
Buffett's comments suggest that there may still be opportunities for investors in today's market.
Are there any good values in the current stock market?
Another interesting note from Buffett's recent interview is this: "I would say I understand fewer businesses as a percentage of the whole than I did 10 years ago. I have not learned new industries for some years." In other words, his circle of competence has stayed the same while the market has expanded in new directions.
Buffett has long avoided most tech companies, as it can be difficult to understand their products and what affords them a competitive advantage. And if Buffett can't understand a business at least as well as everyone else investing in it, he won't invest in it at any price, whether it's a good value or not.
To that point, some of the biggest tech companies may be among the best values in the market right now. Marks, while admitting he doesn't follow them closely, says they're some of the most impressive companies in history. As such, they deserve premium valuations. Still, many of the biggest tech companies trade at price-to-earnings ratios only slightly higher than the average stock.
Another billionaire investor, Bill Ackman, sees the biggest tech companies as holding "durable structural advantages," which give them tremendous earnings power. He also believes many of them deserve premium valuations, and that some currently trade well below their fair value.
It makes sense for investors to diversify beyond the "Magnificent Seven" stocks and other large tech companies. It's possible to find value in almost any sector. Remaining patient and waiting for the market to provide an opportunity is key to successful investing, though. And Buffett just issued a great reminder for all investors that fear and greed are exerting their forces on the market as strongly as ever.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
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