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The Buffett Indicator

Nov 20, 2019 | Fred Abadi |

The Buffett Indicator

Investors listen closely when Warren Buffett makes a market predictions. According to Buffett, the best way to tell if stocks are too expensive is to compare the total value of all equities in the market and the total size of the economy (GDP). When the total value of all stocks is 80% or less than GDP, “buying stocks is likely to work very well for you,” according to a 2001 interview with the famous investor in Fortune. Below 50% of GDP, the market is significantly undervalued, and when the total equity value exceeds GDP, it’s a sign that investors are getting too greedy, and investors going in at these prices will do poorly.

Today, the so-called Buffett Indicator is flashing bright red. The total equity value of the Wilshire 5000 Index (an index of the market value of all US stocks actively traded in the United States) is close to $32 trillion—or 147.5% of GDP. The Buffet Indicator is at its second highest point in history, just below the point it reached in 2000 before the implosion of the dot-com bubble.

graph of the Buffett Indicator up until November 20, 2019

Buffett himself has remained silent about these numbers, but his portfolio speaks volumes for him. Berkshire Hathaway (his investment company) holds a record $116 billion in cash, more than a quarter of the company’s total value of $449 billion.

Buffett has repeatedly said that he hates cash because “cash is going to become worth less over time. But good businesses are going to become worth more over time.” However, higher on his blacklist is overpaying for his investments. Sitting on so much cash means that Buffett sees very few bargains in the current stock market and is hoarding cash for a time when these bargains will be available. This confirms what his famed indicator is signaling about the future of the stock market.

About Fred Abadi

In his over 14 years in the financial industry, Fred has focused on commodities and precious metals as investment assets. He has penned several articles on topics such as the commodities markets and investing in precious metals for retirement accounts. Fred has helped thousands of clients safe-guard their investments with gold and other precious metals. He has been with Gold Alliance for over two years as a leading Sr. Portfolio Manager.