Former Federal Reserve Board Chairman Alan Greenspan said in a 1996 speech that investors were showing “irrational exuberance.” He believed that unfounded optimism drove stock prices higher than fundamentals warranted.
A good argument can be made that we are seeing a recurrence of irrational exuberance today. The S&P500 The Shiller CAPE ratio (cyclically adjusted price-to-earnings ratio) is now significantly higher than when Greenspan made his famous statement 28 years ago. The ratio of total U.S. stock market value to gross domestic product (GDP) is at an all-time high everindicating a market that is extremely overvalued.
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Jim Rogers, a veteran hedge fund manager, recently said, “Somebody better look out the window and worry.” Stifel chief equity strategist Barry Bannister predicts the S&P 500 will plunge 26% by 2025.
Is it safe to invest in the stock market now? Here’s what Warren Buffett does and doesn’t do.
Before we get into what Buffett does, let’s first discuss what Buffett does is not do in an arguably irrationally exuberant market. To paraphrase an oft-quoted saying: doing nothing speaks louder than words.
Sure, Buffett once said that when the ratio of total U.S. stock market value to GDP approaches 200%, investors are “playing with fire.” And yes, that ratio (commonly called the Buffett indicator) is now above 200%. However, Buffett isn’t panicking. He still has that Berkshire Hathaway heavily invested in equities. The conglomerate’s stock portfolio is valued at more than $1 trillion.
The legendary investor isn’t trying to time the market either. Buffett has consistently maintained over the years that he has no idea how stocks will perform in the short term.
What’s important, however, is that Buffett isn’t buying many stocks these days either. He has been a net seller of shares for eight quarters in a row. That’s a clear sign that he’s worried about valuations.
What does Buffett do with stocks near their all-time highs? In short: he practices what he preaches. One of Buffett’s most famous quotes is: “We simply try to be fearful when others are greedy, and to be greedy only when others are fearful.” Buffett is scared right now.
While he isn’t dumping Berkshire Hathaway stock en masse, he is selling some shares. For example, Buffett and his two investment managers have exited positions in multiple companies this year, including Flooring and decor companies, Big global, And Snowflake.
