Wednesday , 27 October 2021

The “Buffett Yardstick” Suggests Markets Are Headed For A Crash

The Buffett Yardstick is ~ 50% higher than its peak set in 2000, widely seen as the top of greatest speculative mania in stock market history…. What does that portend for the stock market investors going forward?

Investor expectations are soaring far beyond any reasonable figure with U.S. investors now expecting to achieve average annual returns of ~17.5% — roughly in line with the most aggressive return expectations seen at the peak of the DotCom Mania and, as a result, they’re pouring money into the equity market like never before…despite the Buffett Yardstick going straight off the top of the chart illustrated below.

What is the Warren Buffett Yardstick?

This yardstick, used by famous business magnate and investor Warren Buffett, shows the market value of all publicly traded companies as a percentage of the total value of all products and services produced by a country, or gross national product (GNP).

Says Buffett: “It is probably the best single measure of where valuations stand at any given moment. For investors to gain wealth at a rate that exceeds the growth of U.S. business, the percentage relationship line on the chart must keep going up and up. If GNP is going to grow 5% a year and you want market values to go up 10%, then you need to have the line go straight off the top of the chart. That won’t happen. For me, the message of the chart is this:

  • If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you.
  • If the ratio approaches 200%–as it did in 1999 and a part of 2000–you are playing with fire.”

[and], right now, the Buffett Yardstick is:

  • ~ 50% higher than its peak set in 2000, widely seen as the top of greatest speculative mania in stock market history…

If Mr. Buffett is right and, “the price you pay determines your rate of return,” investors today are facing a much bleaker future than they were 20 years ago.

Editor’s Note:  The above version of the original article has been edited ([ ]) and abridged (…) for the sake of clarity and brevity to ensure a fast and easy read.  The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.  Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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