Warren Buffett's message to investors: Be careful

• Warren Buffett warned about gambling in markets and the costly AI buildout in a rare interview.
• Several close followers said he seemed concerned about speculation and overinvestment.
• Buffett invested last year in Alphabet, now a nearly $31 billion holding for Berkshire.

Warren Buffett is worried.

The legendary investor called out reckless speculation in markets and the massive cost of the AI buildout during a rare interview with CNBC on Wednesday.

"It's tough to find values when everybody is preferring gambling," the famously disciplined bargain hunter said.

Berkshire Hathaway's 95-year-old chairman, who stepped down as CEO at the turn of the year, said it's been hard to find good deals for years now because the market has shifted in favor of speculators.

He said that "humans love to gamble so much, there's more money in actually cultivating gamblers than there is in cultivating investors."

Business Insider reached out to several of Buffett's close followers for their take on his message. Buffett's secretary didn't immediately respond to a request for comment.

"Buffett is warning investors — not to avoid AI, but to be careful when speculation becomes the dominant force setting prices," Adam Schwartz, the chief investor of Black Bear Value Partners, told Business Insider.

The business icon has "always believed that eventually fundamentals matter, even if they don't seem to for long stretches," Schwartz continued, adding that investor capital is "chasing excitement instead of cash flows" in the AI era.

David Kass, a finance professor at the University of Maryland who blogs about Berkshire, told Business Insider that Buffett does seem "concerned" by "troubling" trends in markets such as growing use of derivatives and shrinking time horizons.

But Kass noted that Buffett's "extreme caution" — Berkshire had a record $380 billion cash pile at the end of March — has stopped him from capitalizing on a "sharply rising equity market over the past few years."

The Alphabet puzzle

Buffett flagged during the interview how so-called hyperscalers such as Meta, Microsoft, and Alphabet are spending hundreds of billions of dollars on microchips, data centers, and other infrastructure to win the AI race.

"That's real money," he said. "That's the game they're playing now. They weren't playing that game with computer software."

Buffett seemed "troubled" by those huge outlays, Kass said, likely because they're eroding cash flows that previously funded stock buybacks, compelling the companies to raise external capital, and raising the prospect they'll spend a ton of money with little to show for it.

Yet Buffett also revealed to CNBC that he decided Berkshire should invest in Alphabet last year. Berkshire ramped up that position to nearly 58 million shares during the nine months ended March 31, securing a stake worth $20.5 billion today.

Berkshire — led by Buffett's successor as CEO, Greg Abel — invested another $10 billion in Alphabet in a private placement in June. The unexpected deal boosted the size of its wager to nearly $31 billion at Thursday's close, assuming no changes have been made. That has made Alphabet the third-biggest holding in Berkshire's stock portfolio after Apple and American Express, overtaking Coca-Cola.

"I think they're more likely to be a winner based on the record than probably 90% or 95% of what gets merchandised through Wall Street," Buffett said about Alphabet.

Brett Gardner, the author of "Buffett's Early Investments," told Business Insider he was a "little confused" by Buffett investing in Alphabet, given his concerns about the cost of the AI buildout.

"To make a bet on Google, I think you need to have some sense of the returns on these investments," Gardner said, but "Buffett didn't seem to have a strong view" on that front.

Buffett might think Alphabet can pare its spending if its AI investments aren't paying off, and "return to gushing cash again, which makes it an attractive investment," Gardner said. "I don't know!"

Whatever Buffett sees in Alphabet, he's picking his spots carefully in a red-hot market, and signaling other investors should do the same.