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Buffett's 'Single Best Measure' Of Valuations Implies We Are In A Bubble: Our Approach



  • Warren Buffett once described "the best single measure of where valuations stand at any given moment."
  • Currently, it implies that the stock market is vastly overvalued.
  • We discuss the bullish and bearish take on current market valuations and our approach at the moment.
  • Looking for a portfolio of ideas like this one? Members of High Yield Investor get exclusive access to our model portfolio. Learn More »

Conference On Issues Affecting U.S. Capital Markets Competitiveness

Chip Somodevilla/Getty Images News

The ratio of total US stock market valuation to GDP has been named "The Buffett Indicator" because Warren Buffett - the legendary CEO of Berkshire Hathaway (BRK.A)(BRK.B) - once called it "the best single measure

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This article was written by

Samuel Smith profile picture

Samuel Smith is Vice President at Leonberg Capital and manages the High Yield Investor Seeking Alpha Investing Group.

Samuel is a Professional Engineer and Project Management Professional by training and holds a B.S. in Civil Engineering and Mathematics from the United States Military Academy at West Point and a Masters in Engineering from Texas A&M with a focus on Computational Engineering and Mathematics. He is a former Army officer, land development project engineer, and lead investment analyst at Sure Dividend.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of ET, GOLD, PAX, VIRT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (36)

Samuel Smith profile picture

Thank you for reading! Let me know if you have any questions.

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@Samuel Smith I'm long ET and curious how their dive into LNG in Lake Charles will compete with established players like Cheniere and up-and-comers like Tellurian. Thanks.
jd99 profile picture
His indicator only works if discount rates (interest rates) remain constant - they have not. Decades ago the 10 yr risk free rate was 15% today it is 3%. Decades ago the revenue / earnings contribution from outside the US was low - today it is approximately half - therefore for this measure to remain relevant you should use mkt cap to global GDP.
This is my favorite Buffett Indicator of all times:

- Buffett bought stocks during the roaring 80s and 90s;
- during 10-20+% minor corrections of the SnP500/DJ;
- he leveraged his account with relatively 'cheap' loans;
- and achieved 30% CAGRs nobody could beat those times.

- Buffett bought stocks during the roaring 2010s;
- during 10-20+% discounts of the SnP500/DJ;
- but this time no longer leverage his account;
- since BRK produced more FCFs faster than he could buy stocks.

I (religiously) followed the BTFD Strategy (Pyramid Scheme) Buffett employed in the 80s and 90s when BRK was relatively a small company wanting to grow very fast by leveraging his account during 10-20+% panic selling discounts caused by minor crisis events.

- GFC bottom fish Method: drive.google.com/...
- Account Management: drive.google.com/...

My best performance = 27% CAGR from 2009 to 2018 before deciding to stop leveraging my account. Far exceeding initial expectations since I'm just a newbie compared to Mr. Buffett.

Most recently, BRK embarked in it's Biggest Buying Binge in History During 10-20+% Minor Corrections of the SnP500/DJ.

- BRK bought $40+ Billions worth of stocks in 1Q2022.

BRK used to have about $135Billions of cash hoard in mid- to late 2010s before the Covid19 crisis happened. Cash Hoard = $147Billions before BRK went into a buying binge last quarter reducing the cash hoard into $140+Billions. Which happens to be I presume BRK's biggest buying binge in history during 10-20+% minor corrections.

- Previous SnP500 Trade Setup: www.tradingview.com/...

I made that Technical Analysis before SnP500 collapsed into lower low this week. The previous TA trade setup using Continuation invHnS did not work this time after 4 successes from 2011 to 2018. Score = 4 out of 5 = 80% success rate. Please check my most recent comment for charts of previous C-invHnS patterns that worked.

- SnP500 Now (weekly): www.tradingview.com/...
- Spx Now (on daily): www.tradingview.com/...

Divergence Buy Signal is my favorite Contrarian Indicator for bottom-fishing purposes.

- Bull Flags Galore: drive.google.com/...
- bottom-fish Part I: drive.google.com/...
- bottom-fish Part II: drive.google.com/...

Thus far = 100% success rate since March 2009 on weekly chart. There was no DBS on weekly chart during 2020 Covid19 Global Lockdowns Crisis; hence I was 'forced' to use the daily chart DBS back in March 23, 2020 as primary contrarian indicator, then utilized the intraday 15-min chart for precision entries in buying 'tons' of 3xETFs.

We will know soon if another Divergence Buy Signal will become feasible for the medium-term weekly chart at the end of this week toward next week. For the aggressive Contrarian Traders, the DBS on short-term daily chart is their better choice to bottom fish as close to the bottom as possible. Best choice was of course by using Intraday Charts in order to reduce potential losses to the absolute minimum, but that requires lots of experience and patience waiting for the 'exact' moment. From 2003 to 2017 = 17 years as a full-time trader; my favorite was the 15-min chart since it was/is much less whipsawy compared to the faster 5-min intraday chart, or worse the extremely fast 1-min chart suitable only for the most experienced contrarian bottom fishers.

Note: Biggest buying binge for BRK was actually for AAPL for $65Billions; but the AAPL buying binge from 2016 to 2018 was initially done by DCA'ing UP the major portion of $65Billions for Apple shares, then buying the last tranches during the 10-20+% correction(s) in 2018.

Cheers and Good Luck.

- reducing cash hoard toward $100+Bs (from $147Bs);

- I read the most recent BRK buying binge from MarketWatch;

In the 2010s, Buffett announced his binges during 10-20+% corrections in most cases a few days before markets bottomed. During those times, I was extra alert to bottom fish using mostly Divergence Buy Signals on 15-min chart for precision entries.


- From 2003 to 2020 = 17 years as full-time trader.

Sorry for that.
@aarc have you a source where I can see what BRK bought?
S&P 500
Price/Sales Ratio


After the housing bubble burst. *

Do the math.

You can torture these ratios to death, but the broad trend is clear: stocks need to fall at least 50% to revert to mean valuations.

* This bubble is bigger.
@Amos Tuck Prices are related to profits, not sales. Prices are where they are because profits are high. Will they go down? Sure, with interest rates going up and the trimming the money supply, growth and profits are going to drop. But, 50% is not going to happen. The market is working already. The bubble already popped.
@Middle American


S&P 500

2000: –45%
2008: –52%
2022: –13% (so far) 🔥

I beg to differ.

The market's peak-to-trough decline will be > 50%.
Dale Roberts profile picture
The lowest real earnings yield for U.S. stocks since the 1950's


I'm happy to buy real yields.
@Dale Roberts yep, oil and gas high fcf and div payers
Wasn't it revealed somewhere that Buffet doesn't even use this 'Buffett Indicator'??
Samuel Smith profile picture
@katieliu76 correct. He is generally not a market timer.
I prefer the adjusted cape as it takes into account interest rates, which matter for equity valuations.

Based on that measure, we’re around fully valued but not in as dire a situation as implied by the GDP metric.
So in other words, flip a coin
@marksolomon1117 diversification (i.e., what he's suggesting) is the opposite of flipping a coin.
The pre-pandemic/election high was ~ January 17, 2020. Based on various market indexes we are currently 21% above that high. With few exceptions, like Energy, Communication, and Utilities we do appear to be overvalued.

@Rellif Curious the lowest ratios, are the old standby inflation hedges. I laugh when people say "this time it will be different". Go with the tried and true Intelligent investor mentality. Worked mostly for Graham, well for Buffett, and many others. The speculators and the pros, cant even beat themselves!
The US stock market is now made up of more global earnings vs domestic, not sure the historic trend makes much sense
@GrowthInvestor1 Unfortunately, that isn't actually true. Foreign revenue (and related earnings) are less than 30% of the S&P (as an example). It's been in that range for the last 30 years. The percentage has actually been falling the last few years (due to US market strength).
Cue Ball profile picture
Cheapest stock market in the World based on that ratio : Russia .
The "Oracle" has always been a US-oriented investor, and that was obviously the market to be in during the 1980s-1990s and in the 2010s, but it pays to pay attention to the rest of the world. World Bank data shows that on a worldwide basis, stocks have been steadily declining in relation to world GDP since 2015. PEs are much lower overseas. More companies outside of utilities, energy, real estate, etc still pay significant dividends in the rest of the world. If you're worried about valuations, then look overseas to countries having stable democratic governments not locking down their populations on a whim.
Samuel Smith profile picture
@Found.Alpha we invest overseas a decent bit as well.
Dominik A. Stutz profile picture

Great point. I have to add that a huge amount of global capital flows and has flown into US stocks. At some point, this trend is going to reverse (if it hasn't already). Then one will be rewarded for owning Ex-US stocks.
Superimpose Inflation Rate on the graph shows a highly inverse correlation to value ratio. Of course that will also be similar to Interest Rates as well.
@Samuel Smith mmm not really considering that's practically EVERY HEADLINE WE SEE IN FINANCIAL NEWS
Great article. The consumer is pinched. Gonna be interesting how this plays out. The fed should have been raising rates at the beginning of last year.
Samuel Smith profile picture
@DadRuss72 thanks for the kind words!
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