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Market Valuation

This episode takes a look at market valuation references such as the Buffett Indicator

In the sixth installment of the "Mastering the GuruFocus Site" series, we take a look at the overall market valuation references on GuruFocus, including the Buffett Indicator and Shiller price-earnings ratio.

The series will consist of 12 short videos (approximately three to five minutes each) meant to provide users with everything they need to know about how to navigate the GuruFocus site quickly, efficiently and to full effect.

Throughout the series, we have made every effort to provide answers to the questions that new users most frequently ask us about. This isn't a cut-and-dry manufacturer's instruction book; we have taken the input we have received from GuruFocus users and used it to create a quick and comprehensive introductory series.

In the next episode, we will be moving on to the personalized features that are available through the user portal, including the "My Portfolios" feature. Stay tuned!

Text version:

Hello, welcome to GuruFocus! This is the sixth episode of "Mastering the GuruFocus Site," a series designed to help you learn your way around at

In this episode, "Valuing the Markets," we will be taking a look at methods for valuing countries and sectors as a whole. These strategies can help give us an idea of how undervalued or overvalued a specific area of the market is. We will also address the most common questions we receive about these valuation methods from GuruFocus users.

First, we will take a look at the Buffett Indicator, or the ratio of a country's market cap to its gross domestic product, which is called as such because famous value investor

Warren Buffett (Trades, Portfolio) has called it his favorite market indicator. You can find the indicator overview and the U.S. valuation here, while the valuations for other countries can be found here in the "by country" section.

What does the Buffett indicator tell us? Simply put, it tells us where the valuation of a country's stock market stands. If total market cap is higher than GDP, it indicates that the market is overvalued. Based on the Buffett Indicator, GuruFocus calculates an estimated average annualized return for a country's stock market.

Keep in mind that this is based on total market cap, not any one stock, and the indicator is mainly used as a reference as well as to identify which countries might present good value opportunities for investors.

One common question we get from GuruFocus users is whether or not the indicator still applies to the U.S. market, since it has been overvalued for almost a decade. The answer to this is yes, the Buffett Indicator applies just as much to the U.S. as it does to any other country. It is not meant to be a prediction of what will happen to specific stocks or sectors, as every company is different. Additionally, undervaluation or overvaluation for a stock, sector or country can and often does persist for a decade or more without correction.

For more information on the Buffett Indicator and how to use it, make sure to check out our tutorials page.

Next, let's take a look at the Shiller price-earnings ratio, which can be used to value individual stocks as well as sectors as a whole. You can find the indicator's summary page here, while the Shiller PE ratio for each sector can be found here.

Developed by Professor Robert Shiller of

Yale University (Trades, Portfolio), the Shiller PE Ratio is considered a more reasonable market valuation indicator than the PE ratio because it eliminates any fluctuations caused by the variation of profit margins during business cycles.

GuruFocus calculates the Shiller PE assuming that the market will revert to its 20-year historical average. This is to take into account any long-term changes in capital structures that may cause a market to have a higher or lower valuation throughout the decades, while eliminating outdated results from the equation.

You can also find the industry overviews and economic data under the market valuation tab. The industry overviews provide a way to search for companies that fall under a specific industry umbrella, perhaps to find new investment opportunities or to check whether a company has a lot of direct competitors. The economic data section is an extensive database of charts on a wide variety of economic data points such as the GDP of countries and the earnings per share of stock indices.

That's all for this video! Next time, we will be looking at the various useful features that you can access through your user portal, such as the portfolio builder and fair value notes. Stay tuned!

If you want to see more from GuruFocus, make sure to subscribe to our YouTube channel, or find us on social media. Thanks for watching!

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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