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James Li
James Li
Articles (1489)  | Author's Website |

Warren Buffett's Market Indicator Breaks 140%

Dow Jones Industrial Average and total market valuation ratios reach critical milestones

On Nov. 30, the Dow Jones industrial average and the Buffett indicator reached critical milestones: 24,000 for the former and 140% for the latter.

The Dow, which traded at 24,013 at market open, soared over 300 points as the U.S. government made “significant progress on a package of tax cuts” according to CNN Money.

Buffett indicator reaches level not commonly seen in history

Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett (Trades, Portfolio) mentioned that the ratio of total market cap to the gross domestic product is “probably the best single measure” of the total market valuation at any given time. The Buffett indicator reached 140.6%, a new 10-year high and close to the all-time high of 148.50% during the dot-com bubble of 2000. Based on this valuation level, the U.S. market is expected to return -1.8% over the next eight years.




According to Bloomberg Markets, analysts at Goldman Sachs Group Inc. (NYSE:GS) warned that seldom “equities, bonds and credit have been similarly expensive at the same time,” something that has not occurred since the 1920s. Several companies, like Amazon.com Inc. (NASDAQ:AMZN), Alphabet Inc. (NASDAQ:GOOG)(NASDAQ:GOOGL), The Priceline Group Inc. (PCLN) and Markel Corp. (NYSE:MKL), are part of the “Thousand-Dollar Stock Club,” i.e., they currently trade between $1,000 and $2,000 per share.


Buffett increases cash position as market is highly overvalued

As of Sept. 30, Berkshire Hathaway has 56% of its assets in stocks, 36% of its assets in cash and 8% of its assets in bonds. The conglomerate has increased its cash holdings and decreased its stock and bond holdings throughout the past four years.


Buffett stressed four key criteria to find good “defensive plays” in an overvalued market: understandable business, predictable earnings, good economic moat and attractive share price. The Buffett-Munger investing strategy has gained 190.74% since its December 2008 inception, outperforming the S&P 500 index by approximately 1% overall and in at least six of the past seven years.

See also

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Disclosure: I do not have positions in the stocks mentioned.

About the author:

James Li
I am an editorial researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

Visit James Li's Website

Rating: 5.0/5 (10 votes)



Mkonow premium member - 3 years ago

The market will crash in a couple of months. The tax cuts will provide the steroids to be even more over valued. Imagine the market cap of Amazone, Apple, Google all added it up? Look at what's going

on in the moderen art market? No one got poor by leaving the last 10% (or more)....

Timjowers - 3 years ago    Report SPAM

Alternatively, the market is predicting inflation, and/or continued growth.

Aledsmith - 3 years ago    Report SPAM

Do you know if anybody has updated this market indicator so it reflects reality... ie the gdp denominator is calculated to also include overseas gdp in proportion to say revenues?

Gurufocus premium member - 3 years ago

@Aledsmith You are talking about GNP. US GNP and GDP are within 1% of each other because in GNP calculation you need to remove the revenue of foreign companies in the US.

Alex Garcia
Alex Garcia - 3 years ago    Report SPAM

@mkonow there is nothing that says the market will crash. The market can stay overvalued for long periods of time and can continue to go up.



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