Buffett’s Favorite Indicator Is Worthless as a Buy/Sell Signal

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Source: The Chart Store



Today I am going to make a somewhat nuanced argument about the dangers of indicators and metrics for valuing stocks.

Let’s use arguably the greatest investor of all time, Warren Buffett, and what he describes as, “probably the best single measure of where valuations stand at any given moment.” Buffett’s favorite metric compares the total price of all publicly traded companies to gross domestic product. This metric can also be thought of as a way to judge the valuations for all U.S. companies relative to the total amount of U.S. economic activity. According to Buffett, when the resulting figure is above 100 percent, stocks are overvalued.

A Google search for “Warren Buffett’s favorite indicator” will return several million hits and you can find dozens of articles citing the indicator — it is most often used to prove that stocks are pricey.

The reality of its meaning is much more complex . . . continues here

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