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Does Warren Buffett Expect Another Market Crash?

July 31, 2014



-The Socratic Forum-

A Socratic Investor Presentation

Who is Warren Buffett (Trades, Portfolio)?

Often referred to as "The Oracle of Omaha," Warren Buffett is the legendary investor as well as the Chairman of Berkshire Hathaway. His financial success resides in determining when and how much to be invested in stocks, bonds and cash. For more information on take a look at GuruFocus’ profile on Warren.

What has been a common theme in the media’s message since the Berkshire Hathaway Annual Shareholder meeting May 2014?

What is this message in reference to?

At the Annual Shareholder meeting, and in his annual letter to shareholders, Buffett stated an opinion that low-fee managers would outperform high-fee managers over the long run. The message is validated by Buffett’s "money where my mouth is” comment. For after his passing, the advice to his trustee is to put 90% of the funds in a “very low-cost S&P index fund.”

The comment can be found in a link to his public website

What is the message not including?

What has Warren stated previously about “when” the stock market may be attractive?

As stated in the GuruFocus' "Where are We With Market Valuations?" article, "as pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”

What were his comments in a December 2001 Fortune article about the market in 2000?

Memorably he stated that "the ratio rose to an unprecedented level. That should have been a very strong warning signal."

What was the percent return of the S&P 500 after the Market Cap/GDP reached that "unprecedented level?"

Has there ever been another time when Buffett touted a “very low-cost index?”

As stated on in the Buffett: Index funds better for most investors article by Jonathan Stempel dated May 6, 2007, “Buffett said at a press conference,” “A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money.”

What was the Market Cap to GDP at that time?

What was the percent return of a “low cost” ETF that tracks the S&P 500 from May 6, 2007 to March 2009?

Some Questions:

  • Was the media’s message in 2007 forgetting to include the “when” part of Buffett's advice?
  • What have the returns been the last two times the Market Cap to GDP were at these levels?
  • What is the Market cap to GDP today?

  • Considering the "best indicator where valuations stand," is currently near previous highs, might Warren actually be estimating that by the time his trustee is needed, the Market Cap to GDP will be at much lower levels?
  • If the valuation ratio reverts to those historical lows of 40%, and we are currently at 122%, does that mean a near 67% drop is possible?
  • If the valuation indicator reaches those levels wouldn't you also recommend an allocation of 90% to stocks?
  • Might the media, once again, be forgetting to include the “when” part of Buffett's advice today?
  • What was a great lesson in communication and rhetoric from a favorite college professor?
    1. Read the original document; Professor Carolyn Calloway-Thomas Ph.D.
  • Have you read the original shareholder letter?

Note: This article is to invoke dialogue, not provide investment advice.


  • Who is the Socratic Investor?
    1. Value Investing, Global-Macro Hedge Fund Strategist, Philosopher, Psychologist, Teacher, ADD, OCD, Dishwashing Socratic Gadfly
  • What is the Socratic Forum?
    1. A gather place of value oriented, like-minded friends to discuss timely topics pertaining to investing and encourage critical thinking.
    2. Feel free to include your thoughts in the comments section below.

Rating: 3.5/5 (15 votes)



Chompinchuck - 2 months ago
Nice headline of course making sure to use the name Warren Buffett (Trades, Portfolio).

Windplayer13 - 2 months ago

Thank you Chompinchuck. Warren's Market Cap to GNP concept was an eye opener when I first heard about it. Warren is a great investor and wonderful teacher. What are your thoughts about the levels we are at today?

Nelson Nguyen
Nelson Nguyen premium member - 2 months ago

The Market Cap to GNP/GDP are great indicators! Thank you for your presentation on how Buffett uses it!!!

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