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Warren Buffett is one of the most successful investors of all time, in fact he is so successful he has an indicator named after him-The Buffett Indicator. This indicator is used to provide a valuation for U.S. Stocks (The Market).
How is it Calculated?Simply divide the Total Market Capitalization of all U.S. stocks by the latest Gross Domestic Product (Market Cap US Stocks/GPD = Buffett Indicator) Then multiply this number by 100 to get it into percent(%).
What do the numbers mean?
Historically when the Buffett Indicator is below 80-90% it indicates stocks are cheap, and prices may rise. Alternatively, when the Buffett Indicator is significantly above 100% it means stocks are expensive, and prices may fall.As a reference just before the 2008 financial crisis the Buffet Indicator was at 110%, and just before the dot-com crash the buffet indicator was at 145%.
In general you can use this to help gauge the market, but a successful investor always uses more than one tool to aid them in there investments. If there was one method that worked all the time, then everyone would use that and time the market perfectly. Since this is not the reality. This is the reason YP Investors has a number of tools to help you become a successful investor!
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