As the Stock Market Flashes a Warning Signal Only Witnessed 2 Times in 155 Years, Warren Buffett Delivers a Blunt Message to Investors.

The S&P 500 has blasted higher over the past few years, with artificial intelligence (AI) stocks leading the way in this bull market. Over the past three calendar years, the famous benchmark has advanced 78%, and the momentum has generally continued this year, with the index heading for a 13% increase.

All of this has helped investors score many wins, but one of the world’s most successful investors isn’t exactly happy with what he’s seeing these days. Warren Buffett delivered a track record of six decades of market-beating gains as chief executive officer at Berkshire Hathaway. The billionaire retired from that position at the start of this year, but he remains chairman and continues to be involved in investing.

And as the stock market flashes a warning signal only witnessed twice in 155 years, Buffett takes notice. Against this backdrop, this stock market legend has delivered a blunt message to investors.

Image source: The Motley Fool.

Buffett’s strategy

First, let’s talk quickly about Buffett’s investment strategy. Buffett, often called the “Oracle of Omaha,” generated fantastic returns thanks to his commitment to certain investment principles he has stuck to regardless of the market environment. Buffett believes in buying quality stocks for reasonable prices — he particularly likes picking up bargains — and holding onto them for the long term. A great example of this is his investment in Coca-Cola. He opened a position in the beverage giant in the late 1980s and has held onto it ever since. In fact, Coca-Cola remains among Berkshire Hathaway’s top five positions.

This top investor also isn’t influenced by others, so he doesn’t follow market trends. You won’t find him rushing to buy the latest popular stock in a bull market or fleeing stocks during a bear market. In fact, Buffett often goes against the trends, looking for quality stocks that have fallen out of favor or haven’t yet gained favor. The idea is to invest early when the price is right and then benefit as the rest of the market discovers the stock.

Now, let’s consider the current market environment and Buffett’s recent warning. As mentioned, the S&P 500 has soared amid this AI revolution and generally bullish environment. Meanwhile, some headwinds, such as concerns about rising inflation and turmoil in Iran, have slowed momentum at times.

The S&P 500 Shiller CAPE ratio

But the overall increase in the market has resulted in one thing in particular. The stock market now is flashing a warning signal only seen twice in 155 years, and it says: Stocks are historically expensive. The S&P 500 Shiller CAPE ratio has reached beyond the level of 41 — something it’s only done once before, during the dot-com boom.

S&P 500 Shiller CAPE Ratio data by YCharts

The Shiller CAPE ratio is a reliable valuation measure as it considers stock price relative to earnings per share over a 10-year period to account for economic fluctuations. Today, this measure tells us that stocks are trading at their loftiest levels, and history shows us declines often follow.

S&P 500 Shiller CAPE Ratio data by YCharts

As for Buffett, just a few months ago, in an interview with CNBC, the billionaire said that many market participants are “gambling,” and this “gambling mood” is at a peak.

“If you’re buying one-day options or selling them, that’s not investing, it’s not speculating — it’s gambling,” Buffett said.

This trend in the market, along with current high valuations, could result in the stock market following a frequent historical pattern — and declining.

What does this mean for you as an investor right now? It doesn’t mean you should flee the market. Instead, as always, it’s important to consider a stock’s valuation and the company’s financial health and prospects further down the road before buying. When you do this and commit to holding onto a stock for the long term, you’re investing like Buffett and may find opportunities in any market environment.