Warren Buffett's Conspicuous Alarm for Wall Street: His Apprehension Surges as Other Investors Indulge in Greed
Warren Buffett's Conspicuous Alarm for Wall Street: His Apprehension Surges as Other Investors Indulge in Greed
Buffet, throughout his career, has consistently shown disregard for Wall Street's opinions. Unlike numerous large corporations, Berkshire Hathaway shuns the tradition of holding quarterly meetings with financial analysts.
Wall Street might want to take note of Buffet's thoughts, given his stature as a legendary investor. Currently, Buffet appears to be issuing a warning to Wall Street and anyone paying attention.
Buffet's Infamous Adage
In his 1986 Berkshire Hathaway shareholder letter, Buffet referred to two infectious maladies – fear and greed. He likened fear and greed to unpredictable epidemics, influencing human behaviors at random intervals and degrees.
Buffet's analogy paved the way for his most celebrated axioms: "We aim to be apprehensive when others are excited and eager only when others are apprehensive." This philosophy forms the backbone of Buffet's contrarian investment style.
When Buffet authored these words in January 1987 (focusing on Berkshire's operations a year prior), the stock market was experiencing a surge. He acknowledged this, expounding, "With present sentiment in Wall Street, scarcely any fear is perceptible. Instead, jubilation reigns; why not? After all, nothing could be more enticing than participating in a bull market where the worth of companies becomes unrelated to their actual performance."
However, Buffet cautioned, "Regrettably, stocks can't prosper relative to businesses indefinitely." His remark holds prophetic weight considering the ensuing plunge of the S&P 500 by 33% in a few months.
Buffet's Semblance of Fear
To clarify, Buffet wasn't privy to the impending stock market crash in January 1987. He acknowledged this in the Berkshire Hathaway shareholder letter, stating, "[W]e lack insight into whether the market will move up, down, or sideways in the immediate or intermediate future."
I refer to this because Buffet's recent safeguard to Wall Street isn't rooted in a grim prediction. Instead, Buffet's actions scream louder than his words. He's been a net seller of stocks for eight consecutive quarters. Buffet has built Berkshire's cash reserve to an astonishing $325 billion – an all-time high for the company. Furthermore, he didn't authorize any stock buybacks for Berkshire during the third quarter. When Buffet refrains from purchasing Berkshire Hathaway shares, it often signals his pessimism towards the wider stock market.
Perhaps the most persuasive reason to suspect that Buffet is anxious now is the widespread display of greed from other investors. The S&P 500 is near its all-time high. Valuations surge, with the average stock in the S&P trading at roughly 24 times future earnings.
The "Buffett indicator" (the ratio of the market value of all U.S. companies to U.S. GDP) is around 200%. Buffet wrote in 2001, "If the ratio approaches 200% – as it did in 1999 and part of 2000 – you're playing with fire."
Should You Feel Fearful, Too?
I'm hesitant to assert that every investor should be fearful currently. Instead, I would advocate caution.
Buffet's comment in 1987 about buoyant sentiments could apply equally today. Countless stocks are priced for perfection. It's likely that some investors focus excessively on the positive ramifications of deregulation and tax cuts while ignoring the negative consequences of broad tariffs.
Like Buffet, I remain oblivious to the stock market's near-term trajectory. My prediction (again, just a prediction) is that the S&P 500 will continue escalating through at least part of 2025. However, I still advocate caution.
Being cautious, in practical terms, means being hyper-selective when investing, focusing intensely on valuation and development prospects. Keep ample cash on hand to buy excellent stocks at a discount if the market suffers. Consider reducing your positions in stocks for which you harbor no strong convictions.
Horoscopes, advice columns, and investment guides - all aim to present a silver lining, even when the horizon is gloomy. In the realm of finance, however, being overly optimistic can lead to ruinous consequences. As a wise man once said, fear and greed work in cycles – and it pays to be one step ahead.
Given Buffet's current actions, such as being a net seller of stocks and increasing Berkshire Hathaway's cash reserve, it seems he is encouraging caution when it comes to investing money in the stock market, due to the widespread display of greed and high valuations. Buffet's advice to focus on valuation and development prospects, and to keep cash on hand for discounted purchases, highlights the importance of prudence in finance.