The Buffett Indicator Scores Again
There is a very simple reason why Warren Buffett is one of the richest men and greatest investors on the planet.
He follows an easy-to-understand formula based on fundamentals and valuations. On a macro basis, Buffett compares the sum total market capitalization of all stocks to the nation’s gross domestic product.
This is called the Buffett Indicator.
When summed market capitalization of stocks exceeds GDP, he says the market is overvalued. When the opposite is true, he believes stocks are undervalued.
In late February, before the current crisis hit the stock market, the Buffett Indicator was at a record 158.4%. Perhaps that explains why Buffett’s investment vehicle, Berkshire Hathaway was sitting on a war chest of cash totaling $128 billion.
To be fair, that war chest was built over a long period of time as the Buffett Indicator flashed warning signs about valuations for a couple of years. Some even criticized the Oracle of Omaha for missing out spectacularly on the rally of 2019.
With the drop in the market, we believe Buffett and his team will be hunting for opportunities...
At Nicollet Investment Management, we’re doing the same.