What is the Warren Buffet indicator?

The indicator was first suggested by Warren Buffett in an article in Fortune magazine in 2001. Buffett used the ratio to reflect the market’s total valuation as percentage of gross national product, and how the ratio had varied over the previous 80 years. The Warren Buffet Indicator can be calculated for any country with reliable data.

Why does Warren Buffett have a higher valuation?

Warren Buffett acknowledged that the indicator is quite simplistic. There are several factors that can justify higher valuations that are not accounted for by the indicator. Innovation, higher productivity, low inflation and low interest rates can all lead to higher valuations.

How is the Buffett indicator calculated?

The Buffett Indicator is most commonly calculated using the US Wilshire 5000 index, a market capitalization weighted index of the 5,000 most valuable listed companies. The choice of index is not crucial, as long as it includes the majority of listed companies and it is used consistently.

Is Buffett a 'fair value' stock?

The long term average for the Buffett indicator is now around 120%. This could be regarded as ‘fair value’ for the stock market. The lowest levels for the indicator have been 1 to 1.5 standard deviations or 40 to 50%, below the long term average.