Warren Buffett's Wall Street Warning: 3 Things Investors Need to Do in 2025

It can pay to listen to Warren Buffett. The legendary investor has navigated multiple market cycles while generating market-beating returns for his investors for close to 75 years. What is Buffett saying right now? Well, the investor has been quite reclusive as of late (I don't blame him; he is 94 years old). The next time we will likely hear from Buffett is in his annual letter to shareholders and the annual meeting for Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) investors this spring.

What we can do today is look at Buffett's actions with Berkshire Hathaway's invested assets. Right now, one action stands out above the rest: the company's monster cash pile. At the end of the third quarter, Berkshire Hathaway had accumulated $325 billion in cash and equivalents on its balance sheet. The funds were raised through internal profit generation and sales of winning investments such as Apple.

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Buffett isn't necessarily calling for a peak in the stock market. The man has said time and time again that when he has excess cash, it is not because he believes the market will immediately crash. However, it does mean that he is unable to find stocks he is comfortable investing in at current prices, indicating that there may be some excesses in the market at the moment. The last time Berkshire Hathaway's cash pile rose this quickly was right before the crash of the dot-com bubble.

You don't need to sell everything and go to cash just because Buffett has a record cash pile. However, you can heed Buffett's advice and act rationally when the market has animal spirits. Here are three things Buffett would likely want investors to do in 2025 with markets close to all-time highs.

Keep portfolio discipline

Many reading this will have had fantastic stock returns in the last few years. I bet some of you were up over 100% in 2023 and 2024. These returns might lead to more aggressive thinking. Shouldn't I strike while the iron is hot?

One way to do this is by adding portfolio leverage or putting your stocks on margin. Margin can be attained by investing in levered exchange-traded funds (ETFs) that use borrowed money to juice returns or by taking out a loan at your brokerage account. In good times, this can generate phenomenal returns. The 3x levered Nasdaq-100 ETF is up 367% since the start of 2023 compared to 92% for the plain old Nasdaq-100 ETF with no leverage.

Buffett -- as well as his late great partner Charlie Munger -- would recommend avoiding leverage at all costs in your portfolio. Why? Because when the market turns (which it will inevitably do at times), the downside can wipe you out. The levered Nasdaq ETF went into a massive drawdown in 2022, and that was just one year of bad returns.

Investors who own wildly leveraged portfolios can have their entire wealth evaporated in major bear markets such as the Great Recession or the bursting of the dot-com bubble. Don't let it happen to you.

Hunt for value with new cash

Hypergrowth stocks, such as Nvidia and Palantir Technologies, have been huge winners in the last few years. Perhaps they make up large positions in your portfolio now. This doesn't mean they are good buys in 2025. Buffett is not opposed to holding a big winner that gets overvalued to avoid taxes, which he has done before with Coca-Cola. He never buys a stock trading at a nosebleed price-to-earnings ratio (P/E), though.

Most investors will have new cash they can deposit into their brokerage accounts throughout 2025. When utilizing this new cash, it will pay over the long run to not chase hypergrowth winners trading at absurd valuations but instead hunt for value stocks. It may be tougher with the S&P 500 average P/E close to an all-time high, but there is value to be had out there.

Take even one of the largest companies in the world, Alphabet (NASDAQ: GOOG). The tech giant trades at a trailing P/E of 26 with a huge runway for growth still ahead of it. Unlike other artificial intelligence (AI) stocks, Alphabet trades at a reasonable valuation right now and may be a good buy for your portfolio in 2025.

Make sure your portfolio is properly diversified

When making recommendations for individuals, Buffett preaches the benefits of proper diversification. This doesn't only mean spreading out your investments over many stocks but also making sure you aren't concentrated in one sector.

After the monster returns of 2023 and 2024, I am betting some of you have outsized exposure to AI, software, and technology stocks. Even if you own 10 different stocks in this sector, they will likely trade in tandem. If the sector turns, your portfolio could experience a huge drawdown.

Make sure you don't have too much exposure to one stock, theme, or market factor when investing in 2025. It will pay off by preserving your wealth (as well as peace of mind) over the long term.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Brett Schafer has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Apple, Berkshire Hathaway, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.