Warren Buffett Says "Gambling" Is Going on in Today's Market. Here's What History Says Happens Next.

Warren Buffett is not only an expert when it comes to picking the right stocks, but he's also quite skilled at observing financial markets and preparing for what's on the horizon. This means that Buffett often invests differently from others and doesn't go along with the crowd. For example, during the days of the dot-com bubble, Buffett spoke of excessive investor exuberance and the dangers of paying any price for a popular stock. And at times when stocks have slumped, the investing legend has been a buyer as others have fled.

Buffett turned over the chief executive officer role at Berkshire Hathaway to Greg Abel at the start of the year. But the billionaire hasn't completely retired from the world of investing. He remains chairman of the holding company and also has continued to actively share his views about investing and financial markets.

In recent times, Buffett has said "gambling" is going on in the market. Let's check out what history says might happen next.

Image source: The Motley Fool.

Today's market environment

First, though, let's take a closer look at today's market environment and Buffett's general investment strategy. The S&P 500 has skyrocketed in recent years amid excitement surrounding artificial intelligence (AI) stocks. Many companies developing AI products and services, from chip designers to cloud service providers, have seen revenue and their stock prices soar. But in recent times, investors have grown concerned about the enormous levels of spending involved in the AI build-out -- and that's periodically weighed on the performance of AI stocks. Meanwhile, general uncertainties, such as turmoil in Iran, have also put growth stocks under pressure.

As mentioned, Buffett doesn't follow the crowd. He actually prefers buying shares of a company that isn't necessarily on everyone's radar screen or isn't the popular player of the moment. Buffett will only buy shares for a reasonable price -- and when he believes in the company's long-term prospects. In the past, he's said that his ideal holding period is "forever." That may be an exaggeration, but it isn't completely false: Buffett has held onto some of his favorites, such as Coca-Cola, for decades.

Buffett doesn't suffer from the "fear of missing out," something that plagues certain investors, particularly during times of euphoria. These investors rush to get in on a particular popular sector or stock, often ignoring valuations and long-term prospects. For example, Buffett hasn't invested in many AI or tech players -- instead, knowing that you don't have to participate in every investing theme or trend to score a win over time, he focuses on industries he knows well.

Buffett beats the market

All of this has helped the billionaire generate market-beating returns for Berkshire Hathaway over the past 60 years. So we can clearly say that Buffett has demonstrated that his techniques work.

But Buffett doesn't keep all of the wisdom to himself. He has readily shared his thoughts about the market throughout his investing career, and he's continued to do so even in retirement. During Berkshire Hathaway's latest meeting of shareholders in May, Buffett spoke with CNBC and said speculation, rather than long-term investing, was more and more apparent in the market.

"We've never had people in a more gambling mood than now," he told CNBC.

What history says

Now, let's consider what may happen next, according to history, and to do so, it's important to look at valuation levels. The stock market has reached one of its priciest levels ever. In fact, the S&P 500 Shiller CAPE ratio, an inflation-adjusted view of stock price in relation to earnings, recently reached a level that it's only surpassed once before in history -- that was during the dot-com bubble.

S&P 500 Shiller CAPE Ratio data by YCharts

And every time the Shiller CAPE ratio has reached a peak, even one much lower than today's levels, the stock market has gone on to decline.

S&P 500 Shiller CAPE Ratio data by YCharts

So, history suggests that, with companies trading at peak valuations, a decline in stocks could be right around the corner.

What does this mean for you as an investor? Let's refer back to Buffett. This doesn't suggest you should stop investing. The billionaire has continued to invest throughout market environments. Instead, it means you should favor the Buffett approach, and instead of rushing into certain popular stocks at high valuations, search for quality stocks that are trading at reasonable levels. These could be in hot growth areas like AI or in industries that haven't drawn as much attention in recent times. And, by holding on for the long term as Buffett has always done, you may score a significant win -- regardless of what direction the stock market takes next in the short term.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.