Does Warren Buffet think your stocks are overvalued?

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Have you ever heard of The Buffet Indicator? If not, I’m sure you’ve heard of Warren Buffet, the legendary value investor and man who created it. Also known as the Buffet Index or the Buffet Ratio, the Buffet Indicator is the ratio of a country's total stock market value to GDP. 

Buffett Indicator = Total Stock Market Value / Gross Domestic Product (GDP)

The Buffett indicator is the ratio between a country’s total stock market capitalisation — the value of all stocks listed on all exchanges in that country — and the size of its economy, as measured by GDP. It can be a valuable measure of when a country's markets are overvalued or undervalued. And in Buffet's own opinion, it’s “probably the best single measure of where valuations stand at any given moment.”

For the most part, this is of interest to economists and institutional investors, and not closely watched by retail investors, but perhaps we should all be paying more attention!

Buffet developed the indicator after the infamous Dot-Com bubble when tech stocks took on significantly inflated valuations driven by internet hype before it all came crashing down.

So why does it matter? In a US context, the Buffett Indicator expresses the value of the US stock market in terms of the size of the US economy. If the stock market value is growing much faster than the actual economy, then it’s considered overvalued. And as of Monday 19th Aug, the stock market is considerably overvalued according to the indicator. The Market Index is at $56,063 billion, which is about 195.8% of the last reported GDP. Just under twice the economy! This means the US stock market is positioned for an average annualised return of 0%, estimated from the historical valuations of the stock market.

Now, while this is an important indicator, no single metric is illustrative of the comprehensive health or relative valuation of the entire market. But it does beg the question - How likely are public equities to continue growing over the coming years and are we likely to see them take a hit?

A long term strategy will help shield you from a lot of these uncertainties because whether the markets go down or not, (and they inevitably will as we saw last week), you should just keep calm and stay the course - invest when it's up, invest when it's down. However, maybe it's also time to consider how diversified your portfolio is and whether alternatives can help create some stability. Investing in private markets (aka alternatives) could mean investing in markets that have not yet accelerated or are not correlated with the public markets; balancing risk and potentially achieving superior returns.

Ask yourself what are your goals. What are you working towards? Is there a purchase on the horizon you’ll need the money or are you planning to keep your portfolio invested for a long time? Look at the makeup of your portfolio. Is it predominantly index funds or most individual stocks? Are you too concentrated in a particular asset class? How much of it is allocated to crypto, if any? Could you benefit from exploring other asset classes that could either provide greater growth opportunities or stability?

Everyone should be investing for their future but many of us have a tendency to “set it and forget it”. Getting started is the hardest part but once you’re regularly investing it's up to you to make sure it's managed correctly and you are making the most of your hard-earned money. Make sure you’re regularly thinking about the makeup of your portfolio, the fees you’re paying, the tax burden etc. etc. You owe it to your future self and family to do it right!

What we’ve been working on at PitchedIt

• Moving closer to completion of our new brand update 🎨

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• Locked in an amazing designer for our platform redesign 👩‍🎨

The Unsophisticated Investor is brought to you by Scott & Rob, the founders of PitchedIt. We’re both sick of private markets being a playground exclusive to the ultra-wealthy so we started a company to challenge the status-quo. PitchedIt’s singular focus is to unlock private markets for Millennial and Gen Z retail investors and help them build wealth through the highest performing private market opportunities.

Scott & Rob
PitchedIt Co-Founders