The stock market has been on an incredible run since the S&P500 (SNPINDEX: ^GSPC) reached the bottom of the previous bear market in October 2022. Since then, the index is up about 70% at the time of writing. Many stocks have achieved even greater returns in that 26-month period.
Most people think these returns are just the beginning of a strong bull market. According to The Conference Board’s latest US Consumer Confidence report, 56.4% of consumers expect stock prices to rise in the coming year. While that may not sound like an overwhelming share of the population, it is a record number since the survey began collecting this data 37 years ago.
Stock prices are influenced by two major factors – financial performance and investor sentiment – and many companies driving the bull market have posted incredible financial results over the past two years. But smart investors can’t ignore the fact that more people than ever are optimistic about the stock market’s future returns, which has driven prices higher.
Warren Buffett has some appropriate advice for the situation.
By October 2008, the S&P 500 had already fallen 40% from its 2007 peak, and many investors thought things could only get worse. In an op-ed for The New York Times“Fear is now widespread and gripping even seasoned investors,” Buffett wrote. According to The Conference Board research, American consumers have never been more pessimistic about the future of the stock market.
Buffett was forced to remind readers of the simple rule he laid out Berkshire Hathaway‘S (NYSE: BRK.A) (NYSE: BRK.B) 1986 letter to shareholders. “We simply try to be fearful when others are greedy and to be greedy only when others are fearful.”
When Buffett wrote these words in 1987 (to summarize Berkshire’s 1986 financial results), he noted, “There is little fear evident on Wall Street.” At the time, investors had driven up stock prices, and as a result he was unable to find suitable stock investments for Berkshire’s portfolio. Instead, he put about $700 million of Berkshire’s cash into government bonds.
He wasn’t exactly thrilled about it either. “At best, the bonds are mediocre investments,” he said. “They just seemed like the least objectionable alternative at the time.”
In 2008, he applied the exact same idea to the marketplace, with opposite results. He moved his personal portfolio from 100% government bonds to 100% US stocks. It turned out to be an extremely fortuitous move for the Oracle of Omaha. The S&P 500 bottomed out a few months after Buffett published his op-ed and produced incredible returns over the next fifteen years.
In 2024, Buffett seems to be following his rule of almost 40 years ago again. As prices have risen over the past two years, Buffett has consistently sold some of Berkshire’s largest stock holdings. Its selling accelerated in 2024 as investors became increasingly bullish, pushing Berkshire Hathaway’s cash and government bond position to a record $325 billion at the end of the third quarter.
Discussing the growing pile of cash at the 2024 shareholder meeting in May, Buffett reiterated his 1986 comments. “I don’t think anyone at this table has any idea how to use it effectively, and that’s why we’re not using it.” The alternatives to government bonds just aren’t very attractive to Buffett right now.
Once again, investors find themselves in a market environment where “little fear is visible on Wall Street.” Stock valuations have soared to levels last seen during the dot-com bubble. Investors are more confident than ever that stock prices will be higher a year from now and are putting their money aside this year with record inflows into exchange-traded stock funds (ETFs).
However, that does not mean that investors should sell all their shares and put their money in government bonds. But it does require careful consideration of their investments.
Another quote from Buffett applies here: “The less caution with which others conduct their affairs, the greater the caution with which we must conduct our own affairs.” Buffett wrote as much in his 1988 shareholder letter. At the time, he described the market for arbitrage opportunities as excess capital had flooded the market, reducing potential returns and increasing risk.
Buffett reiterated this in his 2017 shareholder letter, which he wrote at a time when investors were more confident than ever before in the future of the stock market. Although the market fell slightly that year, it did not fall completely into bear market territory.
Being afraid doesn’t mean running away from the stock market completely. It means that investors have to be more judicious than the rest of the public if they want to guarantee solid returns.
Finding suitable investments for your portfolio will be more difficult because investor confidence tends to push stock prices up, making them less attractive. But Buffett’s recent portfolio moves suggest there are still plenty of investments that can deliver big returns for shareholders if they know where to look.
Although Buffett was a big stock seller in 2024, he made several relatively small purchases. These purchases have one thing in common: They’re all near the smallest companies Berkshire can invest in to boost its massive portfolio.
But an individual could buy enough for a relatively small portfolio. Buffett’s moves highlight the possibility that there are more opportunities for individual investors in small- and mid-cap stocks than in large-cap stocks, including the stocks represented by the S&P 500.
If you don’t want to take the time to look for great individual stocks, you can buy an index fund or two. The Vanguard Extended Market ETF (NYSEMKT: VXF) offers a way to invest in the entire U.S. stock market, excluding the S&P 500. Investors may also want to consider index funds that focus on value stocks as another option.
No one knows if stock prices will continue to rise in 2025, but Buffett’s advice has proven to be very valuable for decades at this point. It’s worth taking his words into consideration as you plan your next steps as an investor.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
Investors are doing something we’ve never seen before. Here’s Warren Buffett’s best advice for the situation. was originally published by The Motley Fool
