Should You Buy Stocks With the S&P 500 Near Record Highs? Warren Buffett Has Brilliant Advice for Investors

The S&P 500 (SNPINDEX: ^GSPC) has advanced 18% year to date, notching more than three dozen record highs in the process. Factors driving that momentum include enthusiasm about artificial intelligence and anticipated interest rate cuts. Additionally, S&P 500 companies are collectively expected to report an acceleration in earnings growth this year.

However, investors are bound to wonder how long the good times will last. Indeed, many stocks already look expensive from a historical perspective. The S&P 500 trades at 21.4 times forward earnings, a premium to the five-year average of 19.3 times forward earnings and the 10-year average of 17.9 times forward earnings, according to FactSet Research.

Is it safe to buy stocks with the S&P 500 roaring through record highs? Warren Buffett has some brilliant advice for investors.

Berkshire Hathaway's Forms 13F reveal an important pattern

The SEC Form 13F allows retail investors to track trades made by professional money managers. To elaborate, institutional investors with portfolios exceeding $100 million must file a Form 13F with the SEC no more than 45 days after each quarter. Those forms disclose the name, share count, and fair value of each stock owned by the money manager.

Forms 13F filed by Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) reveal an important pattern. Warren Buffett (and his co-investment managers Todd Combs and Ted Weschler) have consistently invested money in stocks through market highs and lows. In fact, not a single quarter passed in last decade without them making at least one purchase, and Berkshire's portfolio more than tripled in value during that period.

More to the point, in the first quarter of 2024, Buffett and his understudies started a position in Chubb , and they added to Berkshire's positions in Liberty SiriusXM Group and Occidental Petroleum . They made those trades despite the S&P 500 roaring through 22 record highs during the first quarter, implying that buying opportunities exist in the current market environment.

That said, Warren Buffett has a few more pearls of wisdom to offer.

Brilliant investing advice from Warren Buffett

Warren Buffett has doled out books' worth of brilliant investing advice over the years, but the quotes listed below are particularly relevant to current market environment.

• "Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."
• "For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments."
• "Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten, and twenty years from now."

Today, the stock market is leaning toward greedy. Not because the S&P 500 has notched dozens of record highs lately, but rather because the index trades at a premium to its average forward earnings multiple over the last five years. So investors should be mindful of valuations when making purchases. There is no such thing as a stock worth buying at any price.

However, Buffett has bought stocks during economic booms and recessions, bull markets and bear markets. So, while the current environment warrants caution, it would be nonsensical to avoid buying opportunities just because the S&P 500 trades near record levels. Historically, 30% of market highs have essentially become market floors, such that the index never declined more than 5% from those peaks, according to JPMorgan Chase .

In that context, investors should not hesitate to buy shares of a reasonably price stock whose earnings are likely to grow significantly. Of course, that begs the question: What is the definition of reasonably priced? Unfortunately, there is no foolproof method to calculating the intrinsic value of a stock. But investors should consider valuation ratios like price-to-sales and price-to-earnings , especially in relation to sales growth and earnings growth, respectively.

For instance, if a stock trades at a material discount to its historical price-to-earnings multiple, there is a good chance it fits the definition of reasonably priced, provided earnings growth is not expected to decelerate sharply. The same applies to a stock trading at a material discount to its historical price-to-sales ratio.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and JPMorgan Chase. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy .