Warren Buffett Indicator

Ratio = Total Market Cap / GDP Valuation
Ratio < 50% Significantly Undervalued
50% < Ratio < 75% Modestly Undervalued
75% < Ratio < 90% Fair Valued
90% < Ratio < 115% Modestly Overvalued
Ratio > 115% Significantly Overvalued

In 1929 before the crash WBI was


Significantly Overvalued

In 2000 before the crash WBI was


Significantly Overvalued

Where is it today?

Wouldn’t it be great to be able to invest like Warren Buffett?  To know if things are high or low?  If you are someone who is trading and jumping in and out of markets Warren Buffett’s advice may be less valuable for you.  However, if you are a long term buy and hold investor it’s imperative to understand the key to your overall success will be the value at which you acquire assets.  If you buy assets that are undervalued and hold them for a long time your performance will be very good.  If on the contrast you buy and hold assets that are overvalued your long-term gains will be poor.  

In a 2001 interview with Fortune Magazine, Warren Buffett highlighted that “the best single measure of where stock valuations are at any moment” is Market Cap/ GDP ratio.  The ratio compares how much money is in the stock market at any given time and compares it to overall GDP (Gross Domestic Product).  He went on to say in the interview that this metric was based in a sound logic that has been evident in the equity markets throughout history.  While investors can get caught up in the moment and chase returns, over time value is best determined by price.  The best way to know if the price of the entire market was high or low was to compare total cash invested in the market to GDP.  His reasoning is that our major corporations make up a large portion of our GDP.   Looking at this ratio over time and the history of our stock markets produced the following conclusions by Buffett.

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