The current market presents a stark contradiction: stocks are high, but the Fed is entering an easing cycle. As billionaire David Tepper notes, he’s “constructive on stocks” due to cheapening money but “miserable” because valuations are sky-high. Warren Buffett mirrors this caution, holding a record high of over $344 billion in cash. This balance reflects the core tension: stocks can easily run higher on investor optimism, yet the consensus is that forward earnings multiples are dangerously stretched. Like Buffett in 1969 and 1997, savvy long-term investors are prioritizing capital preservation, maintaining some exposure while waiting for the inevitable mean reversion to bring prices back down to a prudent level.
Warren Buffett
Actionable market insights delivered to your inbox weekly
How Buffett Thinks About Selling
Selling stocks is harder than buying them. Drawing on lessons from Warren Buffett – investors should sell for four key reasons: (i) when a stock is overvalued relative to bonds, making bonds a more profitable option; (ii) when a superior investment opportunity emerges, though you should be careful not to “sell flowers to buy weeds.”; (iii) when the business fundamentals change, and its competitive advantage is at risk; or (iv) When a predetermined price target is met.
Patience Alone Doesn’t Get it Done
Over the past ~40+ years – the S&P 500 Index has returned an average of ~9.3% annually exc. dividends (i.e., 171.6 Jan 1985 to 5,979.5 Jan 2025). If we limit that to the past decade (from 2015) – that avg annual return increases to 11.4% (excluding dividends). But what matters most is (a) the price you pay; and (b) when you get out. Sitting tight for 10 years does not guarantee a 10% return…