Is Warren Buffett behaving like he did during the dotcom crash?

Smead has done an excellent job of executing the investment philosophy in managing the Smead Value Fund (SMVLX), beating 99% of similar funds over the past 15 years, according to Morningstar data. During that time, it has also outperformed the S&P 500, returning an average of 14% per year, while the index has returned just 13.8% on an annualized basis.

But while Smead is using Buffett and Munger's winning strategy to the upside, he also notices when Buffett is preparing for downside risks. And he believes that's the case right now, as Buffett continues to significantly reduce his positions in stocks like Apple and Bank of America.

For Smead, there are many parallels between Buffett's current actions and his views from 1999. At the height of the dot-com bubble, he decided not to fall for the hype in the technology sector and warned that the market was unlikely to continue its rapid pace.

Between July and September 1999, Buffett presented his market forecast in a series of speeches, which were summarized by Fortune's Carol Loomis in November of that year. In the speeches, he argued that stocks had performed well in the years prior to 1999 because of two factors: falling long-term interest rates and rising corporate profits.

But it is unlikely that share prices will stay at this level, as corporate profits are unlikely to grow as fast as they did in the 1980s and 1990s, even if interest rates fall, Buffett said. In addition, valuations – which are closely linked to interest rates – have risen to extreme levels, clouding the prospects for future earnings.

Of course, the S&P 500 plunged 50% in the following years and exactly a decade later was more than 20% below its September 1999 value.

Since then, however, investors have enjoyed 15 years of ultra-low interest rates and rising corporate profits – a fact that worries Smead. Winning streaks like this cannot last forever.

“The only problem is that it's a curse for the long-term performance of the S&P 500,” Smead said of the 15-year run. “I would say there's probably a 1% chance that over the next 10 or 15 years, people are going to meet their economic needs to finance their future by investing in the S&P 500.”

Smead's forecast is a counter-consensus view that inflation will rise again if the Fed cuts rates. While 10-year Treasury yields are falling, he believes another rise in inflation would push them to 6%. With valuations at all-time highs by many measures, that would spell trouble for the market, he said.

Is inflation a serious threat? The Fed and many others don't think so, as the labor market shows signs of weakening. But Smead believes the labor market is stronger than many realize. An unemployment rate of 4.2%, while rising, is still historically low, and companies are still struggling to find employees.

Given all of this – a resurgence in inflation that would drive up interest rates, high valuations and high corporate growth rates that cannot last forever – Smead thinks the index will perform poorly going forward. And he thinks Buffett thinks so too.

“Look at his behavior,” Smead said. “He is preparing himself for the vicious cycle of sin.”

That means the market's uptrend will eventually reverse and enter a feedback loop of selling, Smead believes. Then, as the index performs poorly, people will start selling it, which will cause its key constituents to underperform, which will trigger the selling of those stocks, which will cause further declines for the index, and so on.

“Eventually it goes the other way,” Smead said. “So many of the variables Buffett talked about in 1999 are more of a curse than a blessing.”