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The Stock Market Is at All-Time Highs -- What Does Warren Buffett Think About It?

Matthew Frankel, CFP, The Motley Fool

The S&P 500 and Nasdaq are at record high levels, and the Dow Jones Industrial Average is only about 2% away from its all-time record close. By several valuation methods, the market is quite expensive in a historical context.

In recent interviews with CNBC and Bloomberg, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) Chairman and CEO Warren Buffett was asked about current stock valuations and how investors should be approaching the market right now, and here's what he had to say.

Warren Buffett surrounded by reporters and smiling.
Warren Buffett surrounded by reporters and smiling.

Image Source: The Motley Fool.

Take the long-term view

Not surprisingly, Buffett advises investors to continue to look at stocks with a long-term mentality.

In a nutshell, Buffett's philosophy is that as companies retain earnings and reinvest in themselves, stocks will intrinsically become more valuable over time. "If you own a business and you plow back a good portion of your earnings into building the business, you're going to have something more valuable on average year after year," Buffett said. As a result, "The stock market builds in underlying value from year to year," although stock prices can be rather volatile.

And although Buffett believes that there will be another market crash, when there will be some extraordinarily cheap stock prices, that doesn't mean that investors should simply wait until another 2009 or similar situation happens. "You can't sit around and wait for it -- you're never going to catch the bottom," Buffett said.

Buffett is still a buyer of stocks

Despite the market's high valuations, Buffett said that Berkshire is actively buying stock right now. "We're buying stock this morning," Buffett revealed.

However, Buffett doesn't necessarily think that the stocks he's buying right now will go straight up over time. "I'm buying stocks, but I'm not buying them because I think they're going to go up next year. I'm buying them because I think they'll be worth quite a bit more money 10 or 20 years from now."

For example, Berkshire recently added significantly to its Apple (NASDAQ: AAPL) position, but it's fair to assume that Buffett won't be too disappointed if Apple stock is worth significantly less a year from now. In fact, if that were to happen, he'd probably buy even more. The reason is simple: Buffett loves Apple as a long-term business and thinks that shares will be worth a lot more than their current price in a decade or two, even if the road to get there isn't a smooth upward path.

Better than bonds, no matter how expensive they get

Buffett reiterated the idea that stocks remain the best asset class to put your money in if your goal is achieving strong long-term returns. When asked if stocks were expensive at the current prices, Buffett said that "It [the stock market] is considerably more attractive than fixed-income securities."

And it's not hard to see why Buffett feels this way. Including dividends, the S&P 500 has generated annualized total returns of nearly 10% over long periods of time, compared with an average of about 4% for bonds.

Furthermore, consider some of the other "expensive" times to buy stocks in recent history. If you had bought an S&P 500 index fund at the market's 2000 peak before the dot-com bust, you'd be sitting on a total return of about 180% today (about 6% annualized). And if you had invested at the market's 2007 highs before the financial crisis hit, you'd have a 142% total return now (8.4% annualized). While I wouldn't call these stellar returns, the point is that even if you invest at the worst possible times, stocks still outperform fixed-income investments over the long run.

In other words, even if it's not an ideal entry point right now -- and it's easy to make the case that it's not -- investors who are in the market for the long haul will do just fine.

More From The Motley Fool

Matthew Frankel, CFP owns shares of Apple and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.