Should You Buy Stocks Now? Warren Buffett's Take on Market Valuations

As the S&P 500 soars in the double digits over the past two years, investors have piled into growth stocks, betting on their success in a lower interest rate environment. However, this surge in stock prices has also resulted in higher valuations, leaving many investors wondering if it's still a good time to buy stocks. To help answer this question, let's turn to one of the world's most successful investors, Warren Buffett, and examine his approach to market valuations.



Buffett's focus on long-term investing and value
Buffett, the chairman of Berkshire Hathaway, has consistently delivered market-beating returns by following a long-term investment strategy and focusing on value. He seeks to invest in industries and companies he understands, holding on for the long term, and always getting in on stock at a reasonable price. Buffett may be the world's most well-known value investor, as he buys stocks when they are trading below their intrinsic value, with the idea that the rest of the market will eventually recognize the company's strengths and hop on board, pushing the stock higher.

The market's current situation
As stocks have advanced over the past two years, so have valuations. A great measure to consider is the S&P 500 Shiller CAPE (cyclically adjusted price-to-earnings) ratio, which considers stock prices and earnings over a 10-year period to account for economic fluctuations. Today, this measure has done something it's done only two other times since the S&P 500 launched as a 500-company index back in the late 1950s: It's surpassed the level of 37, suggesting that stocks are particularly expensive right now.



Buffett's recent moves
Last year, Buffett wasn't a buyer of stocks but rather a net seller. His net sales totaled $134 billion and included the sales of some of his biggest holdings, such as Apple and Bank of America, in which he reduced his holding by 67% and 34%, respectively. This helped Berkshire Hathaway build up a record cash position of more than $334 billion. In his recent letter to shareholders, the billionaire wrote, "Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities."

Considering Buffett's recent moves, it's clear that he didn't find many opportunities in the market last year. And knowing the billionaire's interest in value, with the market trading at today's levels, he clearly hasn't been piling into stocks. However, this doesn't mean he's stopped investing in stocks altogether. He is still watching the market closely and buying selectively. For example, in the fourth quarter, he opened a new position in Constellation Brands (STZ) and increased his position in Domino's Pizza (DPZ) by more than 86%. Both companies are trading at lower valuations in relation to forward earnings estimates than they were a year ago.



How to follow in Buffett's footsteps
So, to follow in the footsteps of Buffett, should you avoid buying stocks right now? Not necessarily. Just because Buffett hasn't found opportunities galore doesn't mean he's stopped investing in stocks. He is still watching the market closely and buying selectively. For example, in the fourth quarter, he opened a new position in Constellation Brands (STZ) and increased his position in Domino's Pizza (DPZ) by more than 86%. Both companies are trading at lower valuations in relation to forward earnings estimates than they were a year ago.



In conclusion, while the market may be trading at high valuations, there are still opportunities to be found. By following Buffett's approach of focusing on value and long-term potential, investors can identify undervalued stocks and build a strong portfolio. However, it's essential to be patient and selective in your investments, as the market may not always provide compelling opportunities. By staying disciplined and maintaining a long-term perspective, investors can successfully navigate today's market and build wealth over time.