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James Li
James Li
Articles (830)  | Author's Website |

Warren Buffett’s Market Indicator Breaks 140%

US markets continue strong start to 2019, Dow briefly exceeds 26,100

On Friday, Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett (Trades, Portfolio)’s favorite market indicator reached 140.3%, approximately 6% higher than its Feb. 1 reading of 134.3% and 16.7% higher than its Jan. 2 reading of 123.6%.

Dow escalates sharply over past two months

Although the Dow Jones Industrial Average briefly exceeded 26,100 in morning trading, it closed at 26,028.76, down 103.59 points from the intraday high of 26,132.35 but 112.76 points from Feb. 28’s close of 25,916. Despite this, the index has increased approximately 3,346.54 points since its year-to-date low of 22,682.22 on Jan. 3. Likewise, Buffett’s top holding, Apple Inc. (NASDAQ:AAPL), closed at $174.97, up approximately 23.05% from its year-to-date low of $142.19.

1902293942.png

CNBC columnist Fred Imbert listed several reasons for the strong market increase over the past two months, including decreasing trade tensions between China and the U.S. and declining fears of tighter monetary policy from the Federal Reserve. Despite this, the Dow pared early gains on lower-than-expected consumer sentiment data.

Stock market becomes more overvalued

As the Dow escalates, the U.S. market becomes more overvalued: the ratio of total market cap to gross domestic project stands at 140.3%, approximately 25% higher than the “significant overvaluation” threshold of 115%. Based on this market valuation level, the projected return of the U.S. market is approximately -1.8% per year over the next eight years. Figure 1 illustrates the historical trend of the Wilshire 5000 full-cap index and the U.S. GDP.

1551462136760.png

Figure 1

According to the predefined and actual returns chart, the expected return of the U.S. market ranges from -9.50% in the most-pessimistic case to 3.10% in the most-optimistic case. The green, blue and red lines in Figure 2 indicates the projected returns if the Buffett indicator averages 40%, 80% and 120% over the next eight years.

1551462379289.png

Figure 2

Value screeners continue identifying investing opportunities

GuruFocus has launched new versions of each of the most popular screens, which include the Ben Graham Net-Net Screen, the Undervalued Predictable Screen and the Buffett-Munger Screen. Table 1 lists the value screener record as of March 1.

Screener

USA

Canada

UK

Europe

Asia

Oceania

Latin America

Africa

India

Graham Net-Net

275

64

51

276

606

11

5

13

77

Undervalued Predictable

63

6

33

81

58

5

28

8

7

Buffett-Munger

39

5

15

48

70

0

18

4

29

Peter Lynch PE

32

2

14

39

57

0

4

3

5

Peter Lynch PS

118

8

51

113

95

8

35

24

20

Peter Lynch PB

161

22

65

148

106

8

36

22

38

Lynch p2ebitda

191

7

57

189

120

7

11

17

26

Hist Low PS

43

2

20

41

77

0

15

6

15

Hist Low PB

50

2

21

44

81

2

20

9

13

High Div Yield

73

7

11

102

22

12

16

12

4

Table 1

See also

Buffett included a reference to a “forest of trees” in his 2019 shareholder letter to underscore the importance of owning a diverse basket of companies. The “Oracle of Omaha” also said he views his holdings as “an assembly of companies [Berkshire] partly owns.” Buffett also mentioned his stocks are returning at least 20% on tangible equity and generating profits “without employing excessive levels of debt,” some key criteria in Berkshire’s four-criterion investing approach. As of year-end 2018, Berkshire’s equity portfolio has high exposure to the financial services, technology and consumer staples sectors. The conglomerate’s top six holdings are Apple, Bank of America Corp. (NYSE:BAC), Wells Fargo & Co. (NYSE:WFC), The Coca-Cola Co. (NYSE:KO), American Express Co. (NYSE:AXP) and The Kraft Heinz Co. (NASDAQ:KHC).

Disclosure: No positions.

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About the author:

James Li
I am an editorial assistant and 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 (2 votes)

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Comments

TodWong
TodWong - 5 months ago    Report SPAM

what do we do?

Valuator
Valuator - 5 months ago    Report SPAM

Yet he still claims the market is buyable. He's repeating the dot com crash all over again.

I haven't heard him say anything about the profit margin bubble, yet he was saying 6% was fair in the 2002 shareholder meeting or so.

If valuations and margins normalize, prepare for a 75% loss.

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