Buffett Indicator at All Time High



Warren Buffett $BRK.B has always been a net buyer of stocks but this year things are different as he's selling more stocks that he's buying. The Buffett indicator is currently at all time high at 180%.


The Buffett indicator is calculated by dividing the total market cap of the US stock market $SPX500 by the US GDP.


The Buffett Indicator is here to tell us if the stock market is expensive or not, it is currently at all time high. When the Buffett indicator is at 100%, it means the Stock market and GDP are at the same size. If it gets to 80%, stocks are cheap and it is time to buy. When it gets to 120%, stocks are expensive and it is time to sell. The Buffett indicator is currently at 180%.


With low interest rates, people are more likely to buy stocks than bonds and this may be one of the reason why valuations on stocks are so high. Warren Buffett compared interest rates with gravity, if we have zero gravity, there's no limit to how high you can go. The Fed is not the one to be blamed since passive investing has also made it easier to buy stocks.


We also need to consider the fact that the US Stock market is a mature market where it is easy for companies to go public. Most of the sales of the big US stocks are outside the US. Even if these companies are contributing to the stock market, they are not contributing to the economy. Only 30% of Apple $AAPL sales are in the US while 100% of the market cap if recorded on a US exchange. Apple contributes more to the economy of other countries than to the US economy. The Buffett indicator in Switzerland is over 300% for the same reason since some of the largest companies in the world are located there while the population itself is small.


Are stocks really cheap? No. If you're investing in a company, you're investing in productivity and innovation. Sooner or later the Fed will leave. Now, they have an infinite amount of money where you can make money investing in a random company. But over the long-term, it is productivity and innovation that matters.


For the time being, the best thing to do is to diversify globally. There are countries where economies and stocks are still growing because of innovation and productivity, for example, South Korea $EWY .


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