Key Points
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Rising stock valuations have made it increasingly difficult to find good buys in the market.
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Bill Ackman and Warren Buffett have both compared the stock market to a casino, given investors’ appetite for risk.
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Some of the smartest, most experienced investors in the world are concerned about the markets right now. While the S&P 500 (SNPINDEX:^GSPC) has continued to do well this year, rising by 10% and hitting new records along the way, it hasn’t been an entirely smooth ride. Plus, with stock valuations remaining elevated, there’s the risk that there may still be a large pullback looming.
Bill Ackman and Warren Buffett are among the most well-known and successful investors in the world, and both are seeing cause for concern in the stock market. They’ve also issued similar warnings about the market this year, suggesting there’s too much risk-taking and gambling going on.
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Ackman and Buffett compare the stock market to a casino
In a recent interview with CNBC, Ackman pointed to the nonsensical prices that many stocks trade at, stating that, “stocks trade at prices that make no sense to me” and that “we’re back to the casino-type markets when there was 95% leverage.”
This sounds remarkably similar to the warning Buffett issued months earlier about the difficulties in finding stocks to buy given their egregious valuations. “It’s tough to find values when everybody is preferring gambling.” Buffett, the former Berkshire Hathaway CEO, has in recent years mentioned the inability to find good deals in the markets and not seeing a whole lot to buy. Now, with the S&P 500 on track to deliver a 10% gain or better for the fourth consecutive year, it may be more difficult than ever to do that.
The takeaway from these warnings is not to ignore valuations
Many stocks have been soaring to incredibly high valuations even though they don’t appear to be justified given their underlying financials. Space Exploration Technologies Corp with its roughly $2 trillion market cap, stands out as an obvious example, as does Palantir Technologies, which trades at more than 100 times its earnings.
Buying these types of stocks at mammoth premiums opens investors up to the risk of corrections later on. It’s important for investors to be prudent and disciplined when investing in stocks to ensure they aren’t just chasing hot trends that may end up fizzling out later on.
For long-term investors, the safest move may be to simply track the S&P 500 through index funds these days. Ackman and Buffett’s warnings, however, shouldn’t be ignored, as there are definitely reasons for investors to exercise caution these days.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Palantir Technologies, and Space Exploration Technologies. The Motley Fool has a disclosure policy.
