Warren Buffett and Broadcom’s CEO Issue a Similar Blunt Warning to Wall Street. Here’s What Investors Should Do Next, According to a Key Buffett Investing Principle.

The S&P 500 has roared higher in recent years, driven in particular by artificial intelligence (AI) stocks. Investors have been eager to get in on the players potentially leading a fresh technology revolution that may eventually supercharge earnings growth. Some companies -- and their shareholders -- are already winning. For example, memory maker Sandisk has jumped 500% this year, while AI software company Palantir Technologies has advanced 1,100% over the past three years. And this follows soaring revenue thanks, at least in part, to AI demand.

Though the overall picture remains bright, with the S&P 500 reaching new record highs in recent times, some investors have started to worry about potential risks and headwinds -- from the sustainability of AI spending to the general economic backdrop. And just recently, two major figures in the market spoke out in a similar manner.

Billionaire investor Warren Buffett and Broadcom chief executive officer Hock Tan each issued a similar blunt warning to Wall Street. Let's take a closer look -- and consider what you should do next, according to a key Buffett investing principle.

Warren Buffett. Image source: Getty Images.

The S&P 500 has reached new records recently

So, first, a quick look at where the market stands right now. As mentioned, the S&P 500 has reached record levels, adding to gains over the past three calendar years. The index advanced 78% over that time, and this year, it's heading for a 14% gain. In the early days of the AI boom, investors rushed to get in on names of key players, such as chip designer Nvidia and cloud services player Alphabet, and more recently, they've opted for companies providing memory, such as Sandisk and Micron Technology. These companies all have proven themselves to be key players in the AI story and are generating significant revenue amid high demand.

Since many of these companies are heavily weighted in the S&P 500, they've helped fuel its gains. But, as mentioned, certain headwinds have emerged. Rising inflation and higher interest rates -- an initial hike occurred last month -- could weigh on corporate earnings growth. And any potential slowdown in AI demand or infrastructure build-out could be bad news for AI stocks. This has, from time to time, prompted a pause in the S&P 500's momentum.

Still, the overall positive outlook has won out so far, pushing the S&P 500 higher -- and supporting AI stocks.

Buffett and Tan both use the word "casino" when referring to today's market

Now, let's consider the warnings of famous investor Warren Buffett and Broadcom CEO Hock Tan. Both of these key figures used the word "casino" in their comments about investor behavior.

I'll start with Buffett. The chairman emeritus of Berkshire Hathaway, during a CNBC interview at the May shareholders' meeting, likened markets "to a church with a casino attached." The church represents long-term investing and the casino short-term options trading. Buffett said that though more people remain in the "church," many are moving toward the "casino," and "We've never had people in a more gambling mood than now."

Just this month, Broadcom's Tan, speaking at an event and quoted by Bloomberg, said that a lot of investors in AI "set very extreme expectations only to find out that it's almost like they are in a casino." This is because they don't truly understand what they are investing in, he said. Broadcom, a networking expert, has become a major player in the AI story.

Stocks are historically expensive

This gambling mentality among at least some investors represents a risk for the market, particularly with valuations at record-high levels. The S&P 500 Shiller CAPE ratio, an inflation-adjusted view of stock price relative to earnings, recently reached the level of 41, its highest reading ever.

Shiller CAPE Ratio data by YCharts

So, against this backdrop, what should you do next? This brings to mind a Buffett investing principle: Invest in quality companies that you know well. It's key to invest in industries and companies you understand so you can monitor their progress and better determine whether they are likely to deliver growth over time. This also allows you to set reasonable expectations for potential earnings and stock performance.

By investing in what you know, you may pick up an under-the-radar future winner or even a big, well-known stock that the market has turned away from today -- but that has potential to deliver growth over time. All of this means that, while the current "gambling" in the market could lead to a decline, your portfolio of well-chosen stocks may offer you a significant win over the long run.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Berkshire Hathaway, Broadcom, Micron Technology, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.