Investors are doing something we’ve never seen before. Here’s Warren Buffett’s best advice for this situation.

The stock market has been in amazing shape ever since Standard & Poor’s 500 (^ GSBC 1.09%) Hit the bottom of the previous one Bear market In October 2022. Since then, the index has risen by about 70% as of this writing. Many stocks saw greater returns during that 26-month period.

Most people think these returns are just a solid start Bull market. In fact, 56.4% of consumers expect stock prices to rise over the next year, according to the Conference Board’s latest U.S. Consumer Confidence report. While this may not seem like an overwhelming percentage of the population, it is a record high number since the survey began collecting this data 37 years ago.

Stock values ​​are affected by two main factors – financial results and investor sentiment – and many companies leading a bull market have achieved impressive financial results over the past two years. But smart investors can’t ignore that more people are optimistic about future stock market returns than ever before, which has sent prices soaring.

Warren Buffett has some good advice for this situation.

Apply the same advice to three different markets

In October 2008, the S&P 500 was already down 40% from its 2007 peak, and many investors thought things could get even worse. In an editorial by L New York Times“Fear is now widespread, even among experienced investors,” Buffett wrote. In fact, American consumers have never been more pessimistic about the future of the stock market, according to a survey conducted by the Conference Board.

Buffett had to remind readers of the simple rule he established Berkshire Hathaway‘s (BRK.A 1.37%) (BRKB 0.86%) 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 financial results in 1986), he noted that “a little fear is palpable on Wall Street.” At that time, investors drove up stock prices, and as a result, he was unable to find any suitable stock investments for Berkshire’s portfolio. Instead, he pooled about $700 million of Berkshire’s money Treasury bills.

He wasn’t very happy about it either. “At best, bonds are modest investments,” he said. “They simply seemed the least objectionable alternative at the time.”

In 2008, he applied the exact same idea to the market with backfire. He moved his personal portfolio from 100% government bonds to 100% US stocks. It proved to be a very fortuitous move for the Oracle of Omaha. The S&P 500 bottomed a few months after Buffett published his op-ed and continued to produce Amazing returns over the next 15 years.

In 2024, Buffett appears to once again be following his rule of nearly 40 years. As prices have risen over the past two years, Buffett has consistently sold some of Berkshire’s largest stock holdings. Its sales accelerate in 2024 as investors become increasingly bullish, This pushed Berkshire Hathaway’s cash position and Treasuries to a record $325 billion As of the end of the third quarter.

When discussing the growing pile of cash at the 2024 shareholder meeting in May, Buffett echoed his comments from 1986. “I don’t think anyone sitting at this table has any idea how to use it effectively, and so we’re not using it.” Alternatives to Treasuries aren’t very attractive to Buffett right now.

Is it time to exit the stock market?

Once again, investors find themselves in a market environment where “there is no apparent fear on Wall Street.” Stock valuations have risen 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 they are putting their money where their mouth is with record inflows into exchange-traded funds (ETFs).ETFs) this year.

However, this does not mean that investors should sell all their stocks and hide their money in government bonds. But it takes some careful consideration of their investments.

Another Buffett quote applies here: “The less wisely others conduct their affairs, the greater the wisdom with which we should conduct our own.” Buffett wrote this in his 1988 letter to shareholders. At the time, he was describing the market to… Arbitrage Opportunities where excess capital has flooded the market, reducing potential returns while increasing risk.

Buffett repeated himself in his 2017 letter to shareholders, written at a time when investors were more confident than ever in the future of the stock market. Although the market fell somewhat that year, it did not fall completely into bear market territory.

Fear does not mean fleeing the stock market entirely. This means that investors need to be wiser than the rest of the public if they want to ensure strong returns.

Finding the right investments for your portfolio will be more difficult because investor confidence tends to push up stock prices, making them less attractive. but Buffett’s recent portfolio movements She points out that there are still plenty of investments that could deliver significant returns for shareholders if they know where to look.

Pay attention to what Buffett buys

Although Buffett was a big seller of stocks in 2024, he made many relatively small purchases. These purchases have one thing in common: They are all close to the smallest companies that Berkshire could invest in to move the needle for its massive portfolio.

But an individual can buy a lot for a relatively small wallet. Buffett’s moves highlight the potential for more opportunities for retail investors in small and medium-sized companies Medium sized stocks Compared to large stocks, including those represented by the Standard & Poor’s 500 Index.

If you don’t want to take the time to research great individual stocks, you can buy Index fund Or two. the Vanguard Extended Market ETF (VXF 1.35%) It 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 stocks will continue to rise in 2025, but Buffett’s advice has proven extremely valuable for several decades at this point. It is worth taking his words into consideration when planning your next moves as an investor.