Stocks & Commodities V. 33:13 (14–17): Dissecting Buffett’s Macro Buy-Sell Indicator by Matt Blackman

Stocks & Commodities V. 33:13 (14–17): Dissecting Buffett’s Macro Buy-Sell Indicator by Matt Blackman
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Dissecting Buffett’s Macro Buy-Sell Indicator by Matt Blackman

Markets Getting Toppy?

When it comes to investing, the Oracle of Omaha usually plays his cards close to his chest. But here is one favorite indicator that he’s been willing to share.

In an article I wrote a year ago for Advantage titled “Warren’s Best Valuation Measure,” I discussed a macro indicator that Buffett uses to help him decide when stocks are over- or undervalued. But after a close look at the data in the article, it was obvious that further research and observation was necessary.

According to a 2001 Fortune Magazine article (“Warren Buffett On The Stock Market”), Buffett considers US total stock market capitalization to GDP to be “probably the best single measure of where valuations stand at any given moment.”

He had used this ratio at least in part to issue an overall stock market top warning in a speech given in September 1999 (reported on in a November 1999 Fortune Magazine article, “Mr. Buffett On The Stock Market”) and again in January 2009 to start buying stocks again (“Buffett’s Metric Says It’s Time To Buy,” Fortune Magazine). But determining exactly how useful it is as a leading macro technical stock market indicator requires a much closer examination of the charts and data.

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