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It can pay to listen to Warren Buffett. The legendary investor weathered multiple 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 quite reclusive lately (I don’t blame him; he’s 94). The next time we will likely hear from Buffett will be in his annual letter to shareholders and at the annual meeting of 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 invested assets. Right now, one stock stands out above the rest: the company’s massive amount of cash. At the end of the third quarter, Berkshire Hathaway had accumulated $325 billion in cash and equivalents on its balance sheet. The funds were raised through internal profit generation and the sale of winning investments such as Apple.
Buffett isn’t necessarily calling for a stock market spike. This man has repeatedly said that when he has excess cash, it is not because he believes the market will collapse immediately. However, this means he is unable to find stocks he is comfortable investing in at current prices, indicating that there may be excesses in the market at the moment. The last time Berkshire Hathaway’s cash flow grew this quickly was just before the dot-com bubble burst.
You don’t need to sell everything and go to cash just because Buffett has a record cash reserve. However, you can follow Buffett’s advice and act rationally when the market has animal spirits. Here are three things Buffett probably wants investors to do in 2025, when markets are near all-time highs.
Many of those reading this will have achieved fantastic stock market returns over the past few years. I bet some of you are up over 100% in 2023 and 2024. These returns might lead to more aggressive thinking. Shouldn’t I strike while the iron is hot?
One way to do this is to add leverage to the portfolio or put your stocks on margin. Margin can be earned by investing in leveraged exchange-traded funds (ETFs) that use borrowed money to increase returns or by taking out a loan on your brokerage account. In good times, this can generate phenomenal returns. THE 3x Leveraged Nasdaq-100 ETF is up 367% since the start of 2023 compared to 92% for the simple old Nasdaq-100 ETF without leverage.
Buffett – as well as his late partner Charlie Munger – would recommend avoiding leverage in your portfolio at all costs. For what? Because when the market turns (which it inevitably does at times), the decline can destroy you. The Nasdaq Leveraged ETF saw a massive decline in 2022, and it was just a year of poor returns.
Investors who own highly leveraged portfolios can see all their wealth evaporate during major bear markets such as the Great Recession or the bursting of the dot-com bubble. Don’t let this happen to you.
Hypergrowth stocks, such as Nvidia And Palantir Technologieshave been big winners in recent years. Perhaps they currently represent large positions in your portfolio. That doesn’t mean they’re good buys in 2025. Buffett isn’t opposed to holding a big winner that’s overvalued to avoid taxes, which he’s already done with Coca-Cola. He never buys stocks at an eye-popping price-to-earnings ratio (P/E), However.
Most investors will have new cash that they can deposit into their brokerage accounts throughout 2025. As they use this new cash, it will pay off in the long run to not chase the hypergrowth winners trading at absurd valuations, but rather to look for value stocks. This may be more difficult with the S&P 500’s average P/E near an all-time high, but there is value to be exploited.
Take even one of the largest companies in the world, Alphabet(NASDAQ:GOOG). The tech giant trades at a P/E of 26 with huge room for growth still ahead of it. 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 means not only spreading your investments across many stocks, but also making sure you don’t focus on just one sector.
After the monster returns of 2023 and 2024, I bet some of you have outsized exposure to AI, software and technology stocks. Even if you own 10 different stocks in that sector, they will likely trade in tandem. If the industry changes, your portfolio could see a considerable decline.
Make sure you’re not overly exposed to any one stock, theme or market factor when investing in 2025. This will pay off in preserving your wealth (and your peace of mind) over the long term.
Have you ever felt like you missed the boat by buying the best performing stocks? Then you will want to hear this.
On rare occasions, our team of expert analysts issues a “Doubled” actions recommendation for businesses that they believe are on the verge of collapse. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
Nvidia:If you invested $1,000 when we doubled down in 2009,you would have $357,084!*
Apple: If you invested $1,000 when we doubled down in 2008, you would have $43,554!*
Netflix: If you invested $1,000 when we doubled down in 2004, you would have $462,766!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Brett Schaefer holds positions at Alphabet. The Motley Fool holds positions and recommends Alphabet, Apple, Berkshire Hathaway, Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.
