Buffett Said Be Fearful When Others Are Greedy. By One Measure, This Is the Greediest Market in 25 Years.

There are few investors who tend to be quoted as heavily as Warren Buffett. And there’s a reason for that.

As the long-time CEO of Berkshire Hathaway, Buffett is known not just for his ability to choose great companies, but his patient, disciplined approach to investing.

Rather than chase trends or react to headlines, Buffett has long emphasized buying quality assets at reasonable prices and holding them for the long term. At the core of his approach is the belief that markets are driven as much by hype and emotion as they are by value. And that puts investors at risk if they’re not careful.

Buffett’s famous quote applies to today’s market in a serious way

In 2008, Buffett was famously quoted as saying, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”

When investors are “greedy,” markets tend to become overly optimistic. Prices rise quickly, risk-taking increases, and valuations can depart from reality. In these types of markets, Buffett’s advice is simple — slow down, be selective in your investment choices, and avoid overpaying.

During booming markets, stock prices often get pushed above their true value. When that happens, investors take on more risk than they realize.

When fear takes over, it lends to caution. And that’s not a bad thing to have today.

The Shiller CAPE ratio suggests a greedy market

One way to gauge whether the market is leaning toward greed or fear is the Shiller CAPE ratio.

The CAPE (Cyclically Adjusted Price-to-Earnings) ratio measures stock prices relative to the average inflation-adjusted earnings over the past 10 years. Its purpose is to assess whether the stock market is expensive or cheap relative to its long-term earnings potential.

Historically, the CAPE ratio for the S&P 500 has averaged around 17. Today, it sits at roughly 41 — a level that signals extremely elevated valuations.

To put that number in perspective, the most recent time the CAPE ratio was this high was in 1999-2000, during the dot.com peak, when it hit around 44. Following the dot-com bubble burst, the tech-heavy Nasdaq Composite plunged roughly 78%, while the S&P 500 shed about 49% of its value.

This isn’t to say that today’s market is on the verge of a serious crash. High valuations don’t necessarily predict an immediate downturn. But it does pay to be cautious given the numbers at hand.

What investors should do in a greedy market

If today’s market reflects elevated optimism, the takeaway isn’t to panic. But what you should do is assess your portfolio and make sure your assets are age-appropriate and well-diversified. Also, before jumping to add stocks to your portfolio, make sure they’re worth what you’re paying.

Also, make sure you’re thinking long-term as Buffett advocates. Even if the market takes a near-term tumble, being in it for the long run could be your ticket to avoiding serious losses and coming out ahead financially.

Finally, consider holding some cash so you’re able to take advantage of a market crash if that happens. At the time of Buffett’s retirement, Berkshire Hathaway held about 31% of its portfolio in cash and short-term Treasury bills.

And to be clear, a market tumble is bound to happen at some point. It may not happen to the same extreme as it did following the dot.com bubble, but market downturns are common, especially following periods of elevated valuations. Being prepared could put you in a great position to capitalize on the next dip.