Investors watch Warren Buffett’s every investment move for one key reason: The billionaire has proven his knowledge of the market over time, guiding Berkshire Hathaway to market-beating returns over nearly 60 years. The holding company has delivered a compounded annual gain of almost 20% throughout that time versus a 10% such increase by the S&P 500 index.

Soon, though, Buffett will be stepping out of the limelight as he hands over the role of Berkshire Hathaway chief executive officer to Greg Abel, currently the company’s vice chairman of non-insurance operations – a move announced during the shareholder meeting earlier this year. The billionaire will remain chairman of the company, and Abel will take over the job of putting Berkshire Hathaway’s cash to work as of Jan. 1.

But Buffett isn’t standing still in his last months at the helm, and in recent times, he even sent out a fresh warning to Wall Street. Let’s find out more.

Image source: The Motley Fool.

Buffett’s investment strategy

First, let’s quickly talk about Buffett’s investment strategy and his work over the past several decades. The top investor has stuck to the same principles throughout his career, and he’s never been swayed by market euphoria or panic. Buffett doesn’t follow market trends or rush into the latest hot stock — instead, he favors long-term investing and focuses on industries and companies he knows well.

At the same time, Buffett is a value investor, meaning he goes for stocks that trade at a discount to peers or at reasonable prices with the idea that the market will recognize their true value farther down the road. The strategy, as you can see through the performance I mentioned above, clearly has worked.

Finally, Buffett also favors companies that commit to dividend payments over time, names such as Coca-Cola and American Express — these two are among Buffett’s five biggest holdings.

All of this has helped Buffett score win after win over the years and inspire other investors to follow in his footsteps. But this doesn’t mean that Buffett always has something bright to say about the market, and this leads us to the investor’s fresh warning to Wall Street as the S&P 500 trades near a record high.

Two actions by Buffett

Buffett’s warning doesn’t come in the form of words but instead in the form of two actions. In the third quarter, the billionaire was a net seller of stocks for the 12th straight quarter, and Berkshire Hathaway’s cash pile soared to a record $381 billion. So, the level of cash greatly exceeds the value of Berkshire Hathaway’s equity portfolio, now worth $283 billion.

Now, you could argue that Buffett merely is setting aside cash for Abel to deploy — Buffett joked about this idea at the shareholder meeting in May, saying he wouldn’t do something “so noble” as to stop investing in order to boost Abel later on. And the trend of Berkshire Hathaway’s sales of equities and cash accumulation over many quarters tells us this isn’t a last-minute move by Buffett. Instead, considering Buffett’s commitment to value investing, his decisions may be linked to one particular factor: the idea that stocks have become more and more expensive. And Buffett won’t buy an overpriced stock.

The price of stocks

A look at the S&P 500 Shiller CAPE ratio, an inflation-adjusted measure of stock prices in relation to earnings, highlights this move from reasonably priced to sky-high. The Shiller CAPE ratio has reached 39 in recent times, a level it’s only touched once before throughout history.

S&P 500 Shiller CAPE Ratio data by YCharts

So, Buffett’s warning to Wall Street, among the excitement that’s driven indexes higher, is the fact that, overall, stocks have become pricey and buying opportunities may be limited.

As Buffett wrote in last year’s letter to shareholders, “Often, nothing looks compelling; very infrequently we find ourselves knee-deep in opportunities.”

Does this mean you should stop investing? Not at all. Buffett himself has continued to buy certain stocks in recent quarters. This just means you shouldn’t get caught up in euphoria and instead should carefully consider a company’s valuation and long-term prospects before buying. If you do this, like Buffett, you can weather any investing environment — and win over the long term.

American Express is an advertising partner of Motley Fool Money. Adria Cimino has positions in American Express. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.

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