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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 Reuters.com 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?
    1. http://www.berkshirehathaway.com/letters/2013ltr.pdf

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 - 3 years ago    Report SPAM
Nice headline of course making sure to use the name Warren Buffett (Trades, Portfolio).

Windplayer13 - 3 years ago    Report SPAM

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 - 3 years ago    Report SPAM

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

Jzaban - 2 years ago    Report SPAM

The indicator Market Capitalization to Gross Domestic Product is outstanding from a macro prespective! Buffet provided the WHAT! Thanks for providing insight into the WHEN!

I feel the graphs provide a excellent visual that allows us to understand the concept!

Hpeterscheck - 2 years ago    Report SPAM

The ratio is definitely something he said, but in subsequent interviews he's also said that at the time it was a major indicator and not that it's a fixed rule that can be used to time markets. In fact buffett says repeatedly you can't time markets or even predict any macro trend so don't waste time doing it. What you can do is understand businesses and value companies and AFTER you value the company only then should you look at the price to avoid biases.

Of course almost no one can do that :). And there's plenty of successful investors that do look at macro I'm sure.

the other piece of his advice is that indexing is protection against ignorance. People tend to think he means that as an insult... It's not. Rather its recognition of human limitation. Few people have the desire, passion or disposition to be full time investors but they can beat most people simply by buying a low cost s&p fund and never looking at stock prices again.

my conclusion is that Buffett thinks if you love business and investing and want to make it your life, you can learn to get really good at it if you learn to ignore the market and pay attention to value... And there's lots of info on how to do that. If you don't want to do that,,, great... Just buy a part of the U.S. economy and focus on what you do love doing. Just doing that will still give a good return in the long run.

Farabounding - 2 years ago    Report SPAM

There are few charts projecting strong influence as S&P 500 over the last five years. It is a well known event that market fell on the bottom in 2009, the S&P scored 215% while leaving many investors bullish. Warren Buffett have proposed a ratio comparing market cap to GDP which shows that stock market is seriously overvalued. In 2001 a interview published by Fortune Magazine states that Warren Buffett Indicator is probably the best single measure, where valuation stand at any given moment. So I seriously consider the warnings goven by Mr Warren Buffett (Trades, Portfolio) and there is also a article which states the base of warren buffett indicator that I would like to share.


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