The Oracle of Omaha
Warren Buffet is probably the most famous investor of all time. His net worth currently stands at over $60 Billion dollars. When Warren speaks, people listen. If you are currently invested in the stock market it’s time to pay attention to what Mr. Buffett’s favourite indicator is telling you.
Warren Buffet’s Favourite Stock Market Indicator
Mr. Buffett uses a simple measure called the Total Market Cap to GDP Ratio. This has historically been an excellent indication of where the stock market (in this case the S&P 500) will be over the next 10 years. Very easy to follow:
- Warren says to buy when the ratio is around 70 or 80%
- Never buy when the ratio is over 100%
- As of June 19, 2016, the ratio stands at 118%
According to the model, over the next 10 years, the S&P 500 will produce negative returns
Buffet’s Big Bet VS Hedge Funds
Approximately 8 years ago, Warren Buffet made a bet with Protégé Partners, a Wall Street money manager. He bet that the stock market index will outperform any 5 hedge funds that Protégé wished to choose over the next 10 years. With 2 years to go on the bet, Warren is firmly in the lead, up 65.7% vs Protégé’s 21.9%. It would take a massive reversal of fortune for Warren to lose this bet over the next two years. Over the long term Buffet seems to get it right.
The Moral of This Story
Over the past twenty years I have heard so many market pundits and experts count Mr. Buffet out. They said he lost his touch. They said he is too old. The fact is, Warren Buffet has consistently shown himself to be an investing genius, and betting against him has almost always been a losing proposition. If his favourite indicator says stocks will be down over the next 10 years I am inclined to believe it.
What to Do?
As an investor, realize that stock markets around the world are very highly correlated. They tend to move up and down together. Make sure your portfolio is not overexposed to an asset class that has little potential. If you have a specific question regarding how this pertains to you and your money, feel free to ask, all questions will be answered without obligation. Simply use the contact form here