Is It Safe to Invest in the Stock Market Right Now? Here's What Warren Buffett Is Doing.

Former Federal Reserve Board Chairman Alan Greenspan said in a speech in 1996 that investors were demonstrating "irrational exuberance." His view was that stock prices were being driven higher than the fundamentals warranted due to unfounded optimism.

There's a good case to be made that we're seeing a repeat of irrational exuberance today. The S&P 500 Shiller CAPE (cyclically adjusted price-to-earnings) ratio is significantly higher now than when Greenspan uttered his famous phrase 28 years ago. The ratio of total U.S. stock market value to gross domestic product (GDP) is at its highest level ever, indicating a market that's extremely overvalued.

Long-time hedge fund manager Jim Rogers recently said, "Somebody better look out the window and get worried." Stifel chief equity strategist Barry Bannister projects that the S&P 500 will plunge 26% in 2025.

Is it safe to invest in the stock market right now? Here's what Warren Buffett is and is not doing.

Image source: The Motley Fool.

What Buffett isn't doing

Before we get to what Buffett is doing, let's first discuss what Buffett isn't doing in an arguably irrationally exuberant market. To paraphrase an often-quoted adage, inaction speaks louder than words.

Sure, Buffett once said that when the ratio of the overall U.S. stock market value to GDP approaches 200%, investors are "playing with fire." And, yes, that ratio (usually referred to as the Buffett Indicator) is now above 200%. However, Buffett is not panicking. He still has Berkshire Hathaway heavily invested in stocks. The conglomerate's equity portfolio is valued at over $1 trillion.

The legendary investor isn't trying to time the market, either. Buffett has consistently maintained through the years that he has no idea how stocks will perform over the near term.

Importantly, though, another thing Buffett isn't doing these days is buying many stocks. He has been a net seller of stocks for eight consecutive quarters. That's a clear sign that he's apprehensive about valuations.

What he is doing

So, what is Buffett doing with stocks near all-time highs? In a nutshell, he's practicing what he preaches. One of Buffett's most famous quotes is, "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." Buffett is being fearful right now.

Although he isn't dumping Berkshire Hathaway's stocks en masse, he is selling some stocks. For example, Buffett and his two investment managers have exited positions in multiple companies this year, including Floor & Decor Holdings, Paramount Global, and Snowflake.

The "Oracle of Omaha" has also made Berkshire's portfolio much less reliant on a couple of its top holdings. Buffett has slashed the conglomerate's stake in Apple and Bank of America in recent quarters.

Notably, Buffett has amassed the biggest cash stockpile in Berkshire Hathaway's history. At the end of the third quarter of 2024, the company's cash, cash equivalents, and short-term investments in U.S. Treasuries topped $325 billion.

BRK.B Cash and Short Term Investments (Quarterly) data by YCharts.

Finally, Buffett has bought a few stocks in recent quarters, including Domino's Pizza, Heico, and Pool. I wouldn't say he's being more highly selective than in the past. Instead, fewer stocks are meeting his criteria for buying.

Is Buffett's approach smart?

Some might think Buffett is being overly conservative by not capitalizing more on the soaring stock market. I have a different take: He's simply doing what has worked exceptionally well for him for decades.

While the stock market is expensive by most valuation metrics, that doesn't mean it can't continue to rise. However, Buffett knows that investing when valuations are more attractive increases his chances of success. Great companies can still be found trading at reasonable (and sometimes even discounted) prices. But in the current environment, they are relatively few and far between.

Panicking doesn't make sense. Neither does attempting to time the market. On the other hand, selling stocks in which you don't have a high conviction, building a solid cash stockpile, and buying only stocks that meet stringent criteria (including attractive valuations) does make sense. I think Buffett's approach is smart for him -- and for most other investors.