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Epoch Times
05-05-2025
- Business
- Epoch Times
What Is the Buffett Indicator?
By Charles Lewis Sizemore From Kiplinger's Personal Finance Buy low and sell high. That sounds easy, right? The problem is defining what exactly 'low' means. How do you define whether the stock market is cheap or expensive? Precisely valuing the market is exceptionally hard. It involves making guesses on several key assumptions such as interest rates or growth in earnings per share. So investors—even all-time greats like Warren Buffett—tend to fall back on 'quick and dirty' metrics. These metrics are designed to tell you whether the market is generally cheap or generally expensive. But they aren't intended to be used with surgical precision. Related Stories 4/22/2025 3/30/2025 It just so happens that the 'Oracle of Omaha' has his very own quick-and-dirty metric, the 'Buffett Indicator.' The Buffett Indicator is a broad measuring stick of whether the stock market is overvalued or undervalued relative to the size of the overall economy. Buffett famously referred to this indicator as 'probably the best single measure of where valuations stand at any given moment' in a 2001 interview with Fortune magazine. It is absolutely not a tool for short-term trading. But it can be a really solid tool for long-term allocation decisions, such as for a 401(k) plan or even in an institutional portfolio like a pension plan. What Is the Buffett Indicator? The Buffett Indicator is calculated by dividing the total market capitalization of a country's publicly traded stocks by its gross domestic product (GDP). Market cap is the total value of all outstanding shares of every publicly traded company. For example, Microsoft's (MSFT) market cap is $2.6 trillion. That's the total value of all Microsoft shares in existence. We add up every other listed company to arrive at a total market cap of a country. If we were putting the Buffett Indicator to work in the United States, we would use the Wilshire 5000 Total Market Index. The Wilshire 5000 includes far more companies than the commonly quoted S&P 500 Index or the Dow Jones Industrial Average. We would divide this comprehensive measure of nearly all publicly traded American stocks by U.S. GDP. In short, the Buffett Indicator equals total market cap divided by GDP. Its utility is based on the idea that, over time, stock values should roughly move with the economy. When this ratio is high, it suggests that the market's valuation is running ahead of the actual economic output, meaning the market is potentially overvalued. A low ratio could indicate undervaluation and possibly a good buying opportunity. It's important to note that the number in a vacuum doesn't mean much. There is no absolute level that means the market is cheap or expensive. You have to compare it over time and look for trends. Historically, the Buffett Indicator has hovered around 75 percent to 90 percent. Values above 100 percent may suggest the stock market is overvalued, although some argue that changes in interest rates, profit margins and globalization have shifted what counts as a 'normal' ratio. The Buffett Indicator has certainly trended higher over the past few decades. The Buffett Indicator in Action Research site GuruFocus calculated the traditional Buffett Indicator along with a modified Buffett Indicator that attempts to adjust for the Federal Reserve's aggressive monetary policy since the 2008 meltdown. Given that Buffett views 100 percent as a rough threshold for overvaluation, the market has spent much of the past 20 years in highly expensive territory. Of course, today we're well above that level. Even after the recent stock correction, the traditional Buffett Indicator is above 190 percent. And the Fed-adjusted Buffett Indicator is sitting at 155 percent. When Buffett endorsed it in Fortune, the ratio had soared to record highs during the dot-com bubble. The indicator fell in the early 2000s following the market crash. But it has climbed steadily in the decades since, often reaching levels well above its historical average. Takeaways From the Buffett Indicator Does the Buffett Indicator's lofty level suggest a market crash is imminent? No, and that's not how the indicator is designed to be used. It's exceptionally poor as a short-term timing tool. Had you dumped your stocks due to overvaluation in the index, you would have missed out on one of the longest and most extreme bull markets in history. But it's a useful tool for understanding where we are in the broader market cycle. You should use it as you balance your portfolio between stocks, bonds, cash, gold and other assets. If you're heavily invested in stocks right now, you might want to look at diversifying your portfolio by upping your exposure to other asset classes. And, likewise, when the indicator dips into 'cheap' territory, you might consider increasing your exposure to stocks. ©2025 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
Yahoo
28-04-2025
- Business
- Yahoo
Warren Buffett Absolutely Nailed the Trump-Induced Market Sell-Off. But When Will the Oracle of Omaha Turn Bullish?
By now, it's no secret that Warren Buffett and his company Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) absolutely nailed the stock market sell-off caused by President Donald Trump's tariffs and global trade tensions. While the market raged in 2024, Buffett and Berkshire stayed conservative, stockpiling a staggering amount of cash and buying very little in stocks. Berkshire also repurchased far fewer shares of its own stock than it has in past years. Whether Buffett and Berkshire foresaw a Trump win in the election and the ensuing trade battle is unknown. But it's clear that Buffett and Berkshire didn't like what they were seeing and largely stayed on the sidelines. With the broader benchmark S&P 500 down about 10% this year (as of April 22), the big question is: When will the Oracle of Omaha turn bullish? Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue » Investors typically only get a look at what large funds like Berkshire are buying once every 90 days or so. That's because large funds are only required to disclose their stock holdings within 45 days of the end of each quarter. Since the first quarter ended on March 31, Berkshire won't need to submit a 13F filing until around May 15. Sometimes, funds will need to file within days of a trade if they acquire a large enough position in a stock or already own a significant amount of a stock they are buying. Berkshire owns large stocks in many of its holdings because its portfolio is so big that to make a difference, it often ends up acquiring a significant amount of a company's outstanding shares. For instance, Berkshire owns nearly 44% of Davita, over 35% of Sirius XM, and over 28% of Occidental Petroleum. As of this writing, Berkshire hadn't submitted any filings disclosing large purchases of new stocks or adding to shares of companies it owns a sizable position in that would require a filing. That doesn't mean Berkshire isn't buying, but we also know that Buffett and the Berkshire team are disciplined and not willing to jump in unless they see "wonderful companies trading at fair prices." Remember, prior to the tariff-induced meltdown this month, the market had pretty much only gone up for about 2.5 years. Despite the sell-off, there's no indication that the market is necessarily undervalued. One metric Buffett likes to look at is called the Buffett indicator, which looks at the market cap of the Wilshire 5000, a benchmark for U.S. stocks, divided by U.S. gross domestic product. Although the Buffett indicator hasn't been below 100% since 2013, it still looks expensive at 176%, which is down from recent all-time highs of over 200%. The Shiller CAPE ratio, which looks at the market cap of the S&P 500 divided by its 10-year average, inflation-adjusted earnings, has dipped down to about 33, near its five-year average but still above its 10-year average. With over $330 billion of cash, cash equivalents, and short-term Treasury bills, it's clear that Berkshire has a war chest of cash it can deploy if something catches its interest. Berkshire has been keen to grow existing positions, so that trend may continue, and Buffett has also been very interested in Japanese stocks lately. Berkshire has also made plenty of great investments in different periods of market turmoil, like when the company bought interests in banks in the wake of the Great Recession. But it's not clear that the market or the U.S. economy has escaped any kind of downturn just yet. There are still many questions regarding where things will shake out with tariffs and what global trade will look like once everyone has played their cards. The consumer was also starting to show some cracks heading into the tariff drama, and the economy may yet still fall into a recession. I doubt Buffett will want to be early with so much uncertainty still in the air. For these reasons, I'm guessing Buffett and Berkshire stayed fairly conservative in the first quarter of the year and will remain very selective regarding any near-term purchases. We'll know for sure in a few weeks. Before you buy stock in Berkshire Hathaway, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Berkshire Hathaway wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $594,046!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $680,390!* Now, it's worth noting Stock Advisor's total average return is 872% — a market-crushing outperformance compared to 160% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of April 21, 2025 Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy. Warren Buffett Absolutely Nailed the Trump-Induced Market Sell-Off. But When Will the Oracle of Omaha Turn Bullish? was originally published by The Motley Fool Sign in to access your portfolio
Yahoo
17-04-2025
- Business
- Yahoo
Should You Buy Stocks After The Recent Market Sell-Off? Here's What One of Warren Buffett's Favorite Valuation Gauges Says.
Stocks have whipsawed this year, as weak economic data, high valuations, and issues around tariffs have confused investors. After everything that's happened in just a few short months, the broader benchmark S&P 500 finds itself down about 9% on the year as I write this, although it's down much more if you look at highs made in the back half of February. This may leave investors wondering if they should buy the dip after the sell-off. Many stocks haven't been this cheap in quite a while, but the saga with tariffs and rising tensions with China makes the environment anything but certain. If you're looking for answers on whether to invest, you can check one of Warren Buffett's favorite valuation gauges. Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue » Buffett has been investing successfully for decades, and his company, Berkshire Hathaway, has widely outperformed the broader market since 1965. While Buffett and his team have never been afraid to adapt, they are also very disciplined and aren't going to pour money into stocks when they think the market is overvalued. They also won't be afraid to buy stocks when there is a market crash. Berkshire made some great investments during the Great Recession and during the early days of the COVID-19 pandemic. One metric that Buffett came up with has since been dubbed the Buffett indicator, which divides the market cap stocks in the U.S. by the country's gross domestic product (GDP). A common approach for the United States is to look at the Wilshire 5000, which attempts to measure the market cap of all U.S. equities. In a 2001 Fortune article, Buffett called this indicator "probably the best single measure of where valuations stand at any given moment." According to data site the ratio was around 177% as of April 12, down from a peak of over 200% earlier this year, but still above the area where Buffett would find the market attractive. Buffett has previously said that the market is most attractive when the Buffett indicator is in the 70% to 80% range. When the ratio is near 200% or higher, a scenario that occurred right before the dot-com bubble, that indicates a very risky environment. Still, it's important to note that the Buffett indicator hasn't been below 100% since 2013, and the U.S. economy and the stock market have changed significantly over the years. For instance, interest rates were extremely low between 2009 and 2022. Since the Great Recession, the Federal Reserve has also pumped trillions of dollars into the economy through quantitative easing, which many believe has led to assets being inflated. The Fed also injected trillions into the economy during the worst of the COVID-19 pandemic. While the agency has started to reduce its balance sheet, it's still quite bloated. Additionally, retail investors have become much more active through digital brokerages, zero-commission trading, and the rise of exchange-traded funds (ETFs), which has increased access and liquidity. If you're looking at the Buffett indicator through a traditional lens, the popular valuation gauge says that U.S. stocks are still very much overvalued. However, as I pointed out, a lot has changed over the years, and the Buffett indicator hasn't read below 100% in over a decade. I certainly think there could be more room to fall for stocks in the near term. Uncertainty among investors is still high, and we don't know how the tariff situation and negotiations between the U.S. and China will play out. If you feel stressed and would prefer to sit in cash for a bit longer, there's nothing wrong with that. But I think investors can always buy stocks, as long as they have a long-term investing horizon and understand that volatility could be high in the near term. I'd recommend dollar-cost averaging, where you automatically invest the same amount of money over regular intervals, which helps smooth out the cost basis and ensures you're not investing based on emotion. Ever feel like you missed the boat in buying the most successful stocks? Then you'll want to hear this. On rare occasions, our expert team of analysts issues a 'Double Down' stock recommendation for companies that they think are about to pop. If you're worried you've already missed your chance to invest, now is the best time to buy before it's too late. And the numbers speak for themselves: Nvidia: if you invested $1,000 when we doubled down in 2009, you'd have $290,963!* Apple: if you invested $1,000 when we doubled down in 2008, you'd have $38,324!* Netflix: if you invested $1,000 when we doubled down in 2004, you'd have $526,499!* Right now, we're issuing 'Double Down' alerts for three incredible companies, available when you join , and there may not be another chance like this anytime soon.*Stock Advisor returns as of April 14, 2025 Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy. Should You Buy Stocks After The Recent Market Sell-Off? Here's What One of Warren Buffett's Favorite Valuation Gauges Says. was originally published by The Motley Fool Sign in to access your portfolio
