Buffett: How To Invest When Stocks Are Overpriced

Let's see how Warren Buffett invest with stocks at high prices...

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If we take a step back and look at what’s been going on with the stock market over the long-term we see some interesting things. Ever since the 2008 market crash, we’ve seen one of the greatest bull runs in history. Stocks have gone up almost 500%, bringing the Russel 2000 above 2000 points. A lot of those gains have occurred in just the previous year where we saw it more than double from 1000 points, to what it is today…

Now this has left a lot of investors including myself, wondering what is the best way to invest with stock prices being so high? As always when it comes to investing, I like to go to Warren Buffett to see what he thinks and see what he is doing.

(Clip 1)

So there is a key clear strategy that Buffett employs. The main game of Warren Buffett is to find stocks that are undervalued. Ever since he picked up Benjamin Grahams book “the intelligent investor” when he was just 19 years old, he’s invested that way. Find stocks that are cheaper than their intrinsic value. Now let’s be honest in today’s market there’s hardly any of those deals floating about.

The S & P 500 is sitting at 46, that’s three times higher than the average of 15 across history. And this is the second highest that they’ve been over the past 140 years.

So Buffett’s strategy is very unique. He’s got a huge cash pile of $138 billion dollars, he could buy any stock, pretty much any business that he wants. But he’s purposely choosing to wait. Just letting that cash pile build up into something that even Jerome Powell would be impressed with.

And essentially he’s waiting for a business to come along at an attractive price. Preferably a big blue chip one, so that he can deploy most of his cash. But right now these businesses don’t seem to be showing up, they all seem to be going for sky high prices. Buffett doesn’t pay any attention to these he only focuses on the parts of the market that are worthwhile…

(Clip 2)

I want to go back to 2008 to give you a look at how Buffett’s strategy works. So 2006, 2007 the market was very pricey, Buffett was struggling to find deals. So he kept his money in short-term treasury bonds, which is considered the same as cash. In 2007 Buffett with Berkshire had $45 billion dollars of cash on him ready to deploy. At that time that was a lot of money for his investing business

Then the great financial crisis hit and stocks fell off a cliff. And we all know what Buffett did, he started buying up stocks like mad. By 2009 that cash pile had reduced to $24 billion dollars, almost half of what he had in 2007.

Buffett is probably one of the most patient investors that there is, if there’s no bargains out there he’s prepared to let his cash build up, until one comes along.

Now as he said in the interview, he used to try shorting stocks when they were clearly overvalued, but it didn’t really work out. You just don’t know how long stocks can run for, even if they are clearly overpriced. Just like people tried to profit from shorting Tesla years ago, because they thought it was well overvalued, it didn’t work out. The shorts failed. As Buffett said “it’s tough to make money shorting stocks”.

What he does like to do when he feels that most of the market is overpriced is look for those particular sectors that may offer some opportunity. As we see in 2021, Buffett did do some buying. He bought into some financial stocks like Aon & MMC, some telecom services, like Verizon & T-Mobile, some consumer stocks like RH & Kroger & also some medical ones like Abbvie, Merck & Bristoll Myers Squibb.

So there are sectors out there that still do offer some opportunity. But you have to be prepared for it. Just like Buffett is, everyday he’s in his office, reading reports, scanning through different stocks & looking for a deal. He has found a few but not many & what he’s mostly doing is accumulating cash and waiting for an opportunity to come…

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DISCLAIMER: It's important to note that I am not a financial adviser and you should do your own research when picking stocks to invest in. This video was made for educational and entertainment purposes only. Consult your financial adviser. * Some of the links on this webpage are affiliate links. This means at no additional cost to you, we earn a commission if you click through and make a purchase and/or subscribe. This has no impact on my opinions, facts or style of video.