According to Buffett indicator market is overvalued

0
498
Buffett indicator

Before we deep dive into this topic, Is this indicator really useful ? answer is yes and no based whom you ask , if you ask your uncle charlie he would throw you big fat yes , but if ask your sister Cathie who has plenty of TESLA stocks she might say Naaaa !

So what is it ?

Buffett indicator can be applied to any country , you take the total stock market valuation divide it by that country’s Annualized GDP and you have it.

At the time writing this article date : 02-Feb-2022

Aggregate US Market Value: $48.5T

Annualized GDP: $24.1T

Buffett Indicator: $48.5T ÷ $24.1T = 201%

This indicator was first introduced by investing Legend Warren Buffett saying “the single measure of where valuations stand at any given point” Of course later this comment was taken back and he doesn’t endorsed it but it is still good way to see where a country and it’s market stand . especially if you like to compare and choose.

Buffett indicator history and trendline

If you check this chart current value of Buffett indicator is almost 56% higher than long-term trend line. which is already gives cloudy picture.

What we don’t like about Buffett indicator ?

While the Buffett Indicator is a great high-level metric, a price/sale ratio is also fairly crude.  It doesn’t take into account the profitability of businesses, only their top-line revenue figure, which can be misleading.


Additionally, the ratio has been trending higher over a long period of time (about the last 30 years) and therefore, many investors question what a reasonable average ratio should be.  While the average is 75%, and many believe being over 100% indicates the market is overvalued, others believe the “new normal” is closer to 100%.


Finally, this ratio is impacted by trends in Initial Public Offerings (IPOs), and the percentage of companies that are publicly traded (compared to those that are private).  All else being equal, if there was a large increase in the percentage of companies that are public vs. private, the Market Cap to GDP ratio would go up, even though nothing has changed from a valuation perspective.

Let’s see where Global Valuation stands at comparing different countries’ Buffett indicator. (22 Feb-2022 data)

CountryGDP ($Trillion)Buffet Indicator : Total Market/GDP Ratio (%)Country ETF
USA23.99182.8SPY
China17.8460.56MCHI
Japan4.7143.33EWJ
Germany 3.9861.05EWG
UK2.96109.27EWU
India2.86101.88INDA
Buffett indicator and Annualized GDP

My 2 cents are on UK and Indian market for 2022-23 Both have given good return in last year and hope to accept the same for coming year.