Warren Buffett Once Summed Up Investing in 13 Words. Here's Why It's More Important Than Ever.
Key Points
Practice caution when the crowd is excited, and get aggressive when everyone is panicking.
With the S&P 500 index’s CAPE ratio approaching 42, investors have concerns about valuation.
While it’s smart to understand the stock market’s sentiment, avoid leaning on it as a predictive tool.
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From 1965 through 2025, Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) shares delivered a compound annual gain of 19.7%. By comparison, the S&P 500 index (SNPINDEX: ^GSPC) registered a 10.5% annualized total return. The benchmark's performance is respectable, but it doesn't hold a candle to the conglomerate.
Warren Buffett's track record is hard to comprehend mainly because of how long he has been at the top of his game. Many observers view him as being the greatest investor of all time. While the Oracle of Omaha has stepped down as Berkshire Hathaway's CEO, his lessons will last forever.
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In today's stock market environment, one of his famous quotes is more important than ever.
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Adopt a contrarian perspective
"Be fearful when others are greedy, and be greedy when others are fearful." Buffett wrote these words in an October-2008 opinion piece for The New York Times. This might be one of his most repeated investing quotes.
At that time, the global economy was in the middle of the Great Financial Crisis. The Oracle of Omaha was simply putting on his contrarian hat. He saw that high-quality companies were being discarded. It seemed everyone was panicking as the subprime housing meltdown rattled financial markets. In his mind, the time was right to be aggressive.
During these distressing times, great businesses can fall to bargain prices. Investors who stay level-headed can buy them at extremely favorable valuations. The opposite is also worth exploring. In euphoric times, stock prices can outrun the instrinsic value of companies. This is when risk might be highest.
Valuation is a constant worry
Buffett's words are important to keep in mind right now. The S&P 500 index has been on an incredible bull run that started four years ago in October 2022. Since then, the benchmark has produced a total return of 131% (as of Oct. 14). It's on pace to finish off a fourth straight calendar year of double-digit gains.
The market's valuation is center stage. It's a huge worry for many investors. The cyclically adjusted price-to-earnings ratio is at 41.8 today. That's significantly higher than the trailing historical average. And it's flirting with the record set during the dot-com bubble period. Considering Berkshire Hathaway's cash balance sits at a colossal $359 billion as of June 30, it appears to be adopting a fearful stance.
However, there's nothing that says the stock market can't keep rising. Valuation was a concern a decade ago. If you were fearful then, you'd have missed out on an unbelievable 10-year performance for the S&P 500 index.
Investors should always try to understand market sentiment, without a doubt. But don't use it as a predictive tool.
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Neil Patel 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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