Buffett has a track record of success that spans nearly 60 years.
The S&P 500 index has soared, confirming its presence in a bull market early this year and going on to reach new records multiple times. The benchmark today is heading for a 22% annual gain, led by investors’ optimism about a lower interest rate environment and excitement about the hot growth area of artificial intelligence (AI). Tech players involved in this fast-growing field have skyrocketed, and many still may have much more room to run over the long term.
All of this sounds great, but it’s left many stocks trading at record highs — and certain valuations looking pretty expensive. This may prompt you to wonder if you really should buy stocks today at a record high. And it’s at times like these that it’s a good idea to turn to investing expert and billionaire Warren Buffett for some wisdom.
Buffett, as chairman of Berkshire Hathaway, has guided the portfolio to a compounded annual gain of nearly 20% over 58 years — well surpassing the 10% compounded annual increase of the S&P 500. So, Buffett has been through many different market phases and has come out a winner over time.
Let’s check out what Buffett has done recently as the stock market rocketed higher — and see if there are some moves we should follow.
Image source: The Motley Fool.
A soaring Shiller CAPE ratio
First, a quick look at what I mean by stocks looking expensive. The S&P 500 Shiller CAPE ratio, a valuation measure considering earnings over 10 years adjusted for various economic cycles, has advanced in recent months. And right now is only the third time it’s reached beyond the level of 35 since the S&P 500’s debut in the late 1950s.
S&P 500 Shiller CAPE Ratio data by YCharts
Now let’s turn to Buffett. The billionaire investor has been more of a seller than a buyer of stocks in recent times. For example, in the second quarter, he and his team at Berkshire Hathaway sold shares of nine different companies — including one of his favorite stocks, Apple (AAPL 0.36%). (And even more recently, Buffett and the team have been selling shares of another favored company, Bank of America.)
But it’s important to put this into context. The billionaire also bought two new stocks in the second quarter (Ulta Beauty and Heico), added to a few long-held positions such as Occidental Petroleum, and held steady on more than 20 other positions.
We don’t know the exact reasons for each individual buy and sell, but we do have some clues. First, let’s consider the sales, most particularly Apple. Buffett suggested at the Berkshire Hathaway shareholder meeting back in May that sales of a position such as Apple are linked to his interest in locking in some profits under the current capital gains tax rate — Buffett said he expected this rate to increase.
Buffett’s biggest holding
It’s key to note that Apple still remains Buffett’s biggest holding by value, indicating the move has nothing to do with a loss of faith in the company. If Buffett thinks capital gains tax rates may be on the rise, it’s also logical he would lock in some gains in Bank of America since it’s another major long-term member of his portfolio.
As for Buffett’s recent buys, they show that even if the S&P 500 as a whole has climbed and some individual stocks are expensive, this doesn’t mean all stocks are too pricey. For example, Ulta trades for 15 times forward earnings estimates, down from 24 times earlier this year.
Of course, Buffett is known for snapping up deals during down markets and, as he’s said, being “greedy when others are fearful.” But the billionaire doesn’t halt investing when the market looks pricey because buying opportunities — quality stocks trading for reasonable prices — can be found in any market environment. Buffett showed us that in the second quarter of this year because even as indexes rose, he still identified opportunities to add to current positions and open new ones.
All of this means that, like Buffett, you should keep investing today and through any market environment. By carefully considering each company individually, you may find bargains, or at least promising and reasonably priced stocks, at any time, and that’s why it’s important to stick with investing no matter what the market as a whole is doing. By picking up these deals year after year, and holding on to these quality players, you may follow in Buffett’s footsteps and set yourself up for a potential win over the long term.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, and Ulta Beauty. The Motley Fool recommends Heico and Occidental Petroleum. The Motley Fool has a disclosure policy.
