It can pay to listen to Warren Buffett. The legendary investor has navigated multiple market cycles and generated market-beating returns for his investors for nearly 75 years. What does Buffett say now? Well, the investor has been quite withdrawn lately (I don’t blame him; he’s 94 years old). The next time we’ll likely hear from Buffett will be 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 move stands above the rest: the company’s massive cash pile. At the end of the third quarter, Berkshire Hathaway had $325 billion in cash and equivalents on its balance sheet. The money was raised through internal profit generation and the sale of winning investments such as Apple.
Buffett isn’t necessarily calling for a stock market spike. The man has said time and time again that when he has excess cash, it is not because he believes the market will collapse immediately. However, it does mean that he is unable to find stocks that he can comfortably invest in at current prices, suggesting that there may be some excess in the market at the moment. The last time Berkshire Hathaway’s cash pile rose this quickly was just before the dot-com bubble burst.
You don’t have to sell everything and start making money just because Buffett has a record pile of cash. However, you can take Buffett’s advice and trade rationally when the market has an animal spirit. Here are three things Buffett likely wants investors to do in 2025, with markets near record highs.
Many reading this will have had fantastic stock returns in recent years. I bet some of you are up over 100% in 2023 and 2024. These returns can lead to more aggressive thinking. Shouldn’t I strike while the iron is hot?
One way to do this is to add leverage to your portfolio or put your stocks on margin. You can earn margin by investing in exchange-traded funds (ETFs) that use borrowed money to earn returns, or by taking out a loan against your brokerage account. In good times this can yield phenomenal returns. The 3x Nasdaq-100 Leveraged ETF is up 367% since the start of 2023, compared to 92% for plain old Nasdaq-100 ETF without leverage.
Buffett – as well as his late great partner Charlie Munger – would recommend avoiding leverage in your portfolio at all costs. Why? Because when the market turns (which it inevitably will from time to time), the downside can wipe you out. The Nasdaq leveraged ETF had a huge pullback in 2022, and that was just one year of poor returns.
Investors who own highly leveraged portfolios could see their entire wealth evaporate in major bear markets like the Great Recession or the bursting of the dot-com bubble. Don’t let it happen to you.
Hypergrowth stocks, such as Nvidia And Palantir Technologieshave been big winners in recent years. Perhaps they now represent large positions in your portfolio. This doesn’t mean they’re good buys in 2025. Buffett isn’t opposed to holding a big winner that’s overvalued to avoid taxes, which he’s done before with Coca-cola. However, he never buys stocks that trade at a bloody price-to-earnings (P/E) ratio.
Most investors will have new money to deposit into their investment accounts by 2025. If they use this new money, it will be worth it in the long run to not chase hyper-growth winners trading at absurd valuations and instead chase value stocks. It may be more difficult now that the average price-to-earnings ratio of the S&P 500 is near an all-time high, but there is value to be had.
Take even one of the largest companies in the world, Alphabet(NASDAQ: GOOG). The tech giant trades at a trailing price-to-earnings ratio of 26, with a huge runway for growth ahead. Unlike other artificial intelligence (AI) stocks, Alphabet is currently trading at a reasonable valuation and could be a good buy for your portfolio in 2025.
When making recommendations for individuals, Buffett preaches the benefits of good diversification. This not only means spreading your investments across many stocks, but also making sure you don’t concentrate in one sector.
After the monster returns of 2023 and 2024, I bet some of you have too much exposure to AI, software and technology stocks. Even if you own ten different stocks in this sector, they will probably trade together. If the industry turns, your portfolio could experience a huge pullback.
When investing in 2025, make sure you don’t have too much exposure to one stock, theme or market factor. It will pay off by preserving your wealth (and peace of mind) in the long term.
Have you ever felt like you missed the boat on buying the most successful stocks? Then you would like to hear this.
On rare occasions, our expert team of analysts provides a “Double Down” Stocks recommendation for companies they think are about to pop. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
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We’re currently issuing ‘Double Down’ warnings for three incredible companies, and another opportunity like this may not happen anytime soon.
See 3 “Double Down” Stocks »
*Stock Advisor returns January 13, 2025
Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Brett Schafer has positions at Alphabet. The Motley Fool holds positions in and recommends Alphabet, Apple, Berkshire Hathaway, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
Warren Buffett’s Wall Street Warning: 3 Things Investors Need to Do in 2025 was originally published by The Motley Fool