It can pay to listen to Warren Buffett. The legendary investor has navigated several market cycles while generating market-beating returns for his investors for nearly 75 years. What is Buffett saying right now? Well, the investor has been reclusive lately (I don't blame him; he's 94). The next time we are likely to hear from Buffett is in his annual letter to shareholders and the annual meeting for Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) investors this spring.
What we can do today is look at Buffett's actions with Berkshire Hathaway's investment assets. Right now, one action stands out above the rest: the company's monster cash pile. At the end of the third quarter, Berkshire Hathaway had accumulated $325 billion in cash and cash equivalents on its balance sheet. The money was raised by generating internal profits and selling winning investments such as An apple.
Buffett isn't necessarily calling for a peak in the stock market. The man has repeatedly said that when he has excess cash, it's not because he believes the market will crash immediately. However, it means that he is unable to find stocks that he is comfortable investing in at current prices, which indicates that there may be some excess in the market at the moment. The last time Berkshire Hathaway's cash pile rose this quickly was right before the dot-com bubble crash.
You don't need to sell everything and go cash just because Buffett has a record cash pile. However, you can heed Buffett's advice and act rationally when the market has animal spirits. Here are three things Buffett would likely want investors to do in 2025 with markets near all-time highs.
Many reading this will have had great stock returns in the last few years. I'm sure some of you are up over 100% in 2023 and 2024. These gains could lead to more aggressive thinking. Shouldn't I strike while the iron is hot?
One way to do this is by adding portfolio leverage or putting your stocks on margin. Profits can be secured by investing in exchange traded funds (ETFs) that use borrowed money to sink returns or by taking a loan in your brokerage account. In good times, this can produce extraordinary returns. The 3x leveraged Nasdaq-100 ETF up 367% since the start of 2023 compared to 92% for the old plain Nasdaq-100 ETF without any leverage.
Buffett – as well as his late great partner Charlie Munger – would recommend avoiding leverage at all costs in your portfolio. Why? Because when the market turns (which it inevitably will at times), the downside can wipe you out. The Nasdaq bullish ETF went into huge money in 2022, and that was just one year of poor returns.
Investors who own wildly leveraged portfolios can have all their wealth evaporate in major bear markets like the Great Recession or the bursting of the dot-com bubble. Don't let it happen to you.
Hypergrowth stocks, such as Nvidia a Palantir Technologieshave been huge winners in the last few years. They may be doing big jobs in your portfolio now. This doesn't mean they're good buys in 2025. Buffett isn't opposed to holding an overvalued big earner to avoid taxes, which he's done before with Coca-cola. He never buys a stock trading at a nosebleed price-to-earnings ratio (P/E), though.
Most investors will have new cash that they can deposit in their brokerage accounts throughout 2025. Using this new money, it will pay off over the long term not to chase hyper-growth winners that trading at ridiculous valuations but instead looking for value stocks. It may be tougher with the average S&P 500 P/E near record highs, but there is value to be found out there.
Take even one of the biggest companies in the world, Alphabet(NASDAQ: GOOG). The tech giant trades at a trailing P/E of 26 with a huge runway for growth still ahead. Unlike other artificial intelligence (AI) stocks, Alphabet is currently trading at a reasonable valuation and could be a good buy for your portfolio in 2025.
When making recommendations to individuals, Buffett preaches the benefits of proper diversification. This not only means spreading your investments over many stocks but also ensuring that you are not concentrated in one sector.
After the monster returns from 2023 and 2024, I bet some of you are overexposed to AI, software and technology stocks. Even if you own 10 different stocks in this sector, chances are they will trade together. If the sector turns, your portfolio could experience a huge drop.
Make sure you don't get too much exposure to one stock, theme, or market factor when investing in 2025. It will pay dividends by preserving your wealth (as well as peace of mind) over the long term.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Brett Schafer he has jobs in the Alphabet. The Motley Fool has positions in and recommends Alphabet, Apple, Berkshire Hathaway, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
