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Buffett's Favorite Indicator Sends A Warning To All Investors

Cooper Academy - Investing

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Published on Aug 21, 2020
The Global Buffett Indicator (Market Cap to GDP), has just surpassed the 100 number mark. This means stocks are now considered overvalued to what they're producing. Let me explain this further and what it means for investors...

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Warren Buffett, ok yup we all recognize, he’s the greatest investor of all-time. He’s the one guy that I know I can go to for reliable information on the stock market. I’ve been paying close attention to him for years upon years now and I got to say, there’s something that’s come up recently, that has got me very concerned on the stock markets future…

Ok, let me break this down. Warren Buffett he’s not known as a guy for timing the market. But the one indicator that he does look at, to see where stocks stand, is the market cap to total GDP. It’s now been named the Buffett indicator because he’s the one who’s made it so famous…

He said back in the day that this indicator is "probably the best single measure of where valuations stand at any given moment.".

So I just want to explain a bit about this indicator before we take a look at what it tells us. So the first part of the equation is the market cap. Basically saying how much are stocks selling for. This gives us a good look at the stock market as a whole.

The next part of the equation is total GDP. By the GDP stands for gross domestic product. Put simply how much is the world producing. How well is the economy going. So the first part of the equation is measuring the stock market, the other the economy…

Now the interesting thing is, if we take a look at the global indicator we can see that’s just surpassed that 100 number threshold. That means that stocks are now overvalued compared to what they are actually producing. But please remember that this is the global indicator. So it’s measuring the worlds entire economy and the entire stock market as a whole. It’s not niched down to any one country…

So let me just explain what this means. A number over 100 means that the stock market is priced higher than what the economy is actually producing.

You see what are stocks. They are businesses that produce. Aka they make up the economy. So you’d want the market cap or the prices of stocks to be cheaper compared to what they’re actually producing. Well at the moment that is not the case anymore when it comes to the world situation as a whole…

Essentially it’s showing us the striking gap between the record high prices of stocks and the depressed economy that we’ve seen recently…
So that’s the global Buffett indicator. The world indicator. What I want to do now is something arguably more important and look at the Buffett indicator when it comes the USA.

And by the way guys, I’m sorry but it’s not good news, the situation in the USA is actually worse, then the world one. Currently the Buffett indicator is sitting at 131%. That means it’s currently modestly overvalued. With anything above 134% considered to be signifcatnly overvalued. So it’s almost getting to that stage.

And rembemer what Buffett said about the indicator and a stock crash back in the day. He said in 2001 that when the indicator hit a record high in the months before the dot-com crash, it "should have been a very strong warning signal.".

So we’re around that stage now, where this indicator becomes a warning signal to all investors. That yea ok you can invest but, you’re investing at high valuations compared to what the stocks are actually producing.

Because you know you look at the stock market, it’s just had its best 100-day run since 1933. This has now lead on to stocks been priced at pretty much record highs. Looking at the S & P 500, it’s now recovered to what it was even before the world illness hit. Which let’s be honest that’s pretty crazy...

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DISCLAIMER: It's important to note that I am not a financial adviser and you should do your own research when picking stocks to invest in. These are just some of my viewpoints, by no means would I recommend watching one YouTube video and then immediately buying that stock. This video was made for educational and entertainment purposes only. Consult your financial adviser.
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