According to Warren Buffett’s math the stock market is officially in ‘playing with fire’ territory. So when is the next crash coming? |
According to Warren Buffett’s math the stock market is officially in ‘playing with fire’ territory. So when is the next crash coming?
When Warren Buffett gets nervous, you and I should probably be nervous too.
The Oracle of Omaha has long held to a simple maxim when it comes to whether the stock market is undervalued, fairly valued, or overvalued. His thesis: The total value of U.S. stocks, over the long term, can’t outpace the growth of businesses as reflected in the GDP. So when the ratio of S&P 500 to national income diverts hugely from the norm, it is bound to swing the opposite way and “revert to the mean.” During the Dot Com bubble, in a 2001 story in Fortune that he penned, Buffett highlighted a chart in the text displaying that at the craze’s peak in March 2000, that number, now known as the “Buffett Indicator,” reached a heady 200%.
“The message of the chart,” he wrote, “is that if the relationship [between the total value of equities and GDP] drops to 70% or 80%, buying stocks is likely to work out very well for you. If it approaches 200% as it did in 1999 and 2000, you are playing........