“You are playing with fire!” What Warren Buffets’ Valuation Indicator can tell us about the market now?

Market Cap to GDP indicator is a long-term valuation indicator which shows the percent of total market cap relative to Gross Domestic Product. The indicator is called Buffett Valuation Indicator because it has become popular thanks to Warren Buffet in recent years . Warren Buffet said during an interview in 2001 that “it is probably the best single measure of where valuations stand at any given moment.”

He explained further in an interview: “For me, the message of that chart is this-  If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%–as it did in 1999 and a part of 2000-you are playing with fire.”

Source: advisorperspectives.com


If we compare this graph with the S&P500 chart we can see what Warren Buffet meant by saying “you are playing with fire.” In the year 2000 the value of the indicator was  151,3%. S&P500 has tanked around 50% in the months that followed. Today the value of the Warren Buffet Valuation Indicator is 125,3%. The analogy presents a very bleak picture.

Comparison between S&P500 and the Buffet indicator

Source: macrotrends.net,tradinglikeabussines.com

However, the market seems to be highly overestimated and we can still find a lot of unevaluated assets and markets with big developing potential. Download my report on the best investing occasions in the coming months (here).

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