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Video: When to Invest - The Buffett Indicator

Charlie Tian explains the most useful tool in determining market value

March 23, 2020

Hi fellow investors,

Today I want to talk about the general market valuation. We know that the stock market went down more than 30% in less than a month during March of 2020. I have talked to some value investors who are saying “Oh, I wish I knew the market was overvalued and I would have put a lot more money in cash.” You can never know exactly, but there are ways to figure out the value of the general market. The place you can get this is Warren Buffett (Trades, Portfolio)’s Buffett Indicator located on GuruFocus.com.

What is the Buffett Indicator? The Buffett Indicator is calculated by the total market cap over GDP. As said by Warren Buffett (Trades, Portfolio), this is “probably the best single measure of where valuations stand at any given moment.” So where did market valuations stand a month ago?

A month ago this ratio was above 150% and historically that was the highest point it ever reached. Even during the bubble of 2000, the ratio was still slightly lower and in 2007, the ratio was even lower. Prior to everything that has happened in recent events the market was standing above 150%.

Today, because we lost about 30% of market value from the general market, this ratio is standing at about 110%. The valuation is much better, but how does that 110% ratio compare with the historical value? According to the Buffet Indicator, things are still not that cheap and the market is modestly overvalued. The projected return is still only 1.6% over a year from today for the next eight years, which is including dividends.

The market is still overvalued, though it is much better than it was before and if you want to buy I think it is a much better time to buy as I have mentioned in previous videos. However, you still need to be cautious.

Another question that I have received is can you apply the Buffett Indicator to other markets? Can we find a cheaper market to invest in globally? GuruFocus offers a Global Market Valuation page that I will explore in the next video.

Good luck investing and thank you for watching,

Charlie Tian

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About the author:

Charlie Tian, Ph.D., is the founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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