Thursday, October 5, 2017

Buffett

Warren Buffett has written that two numbers in the economy provide a good indicator as to stock value: the total value of all equities in the market and the total size of the economy. The key is their relationship.
When the value of all stocks is 80% or less than the size of the economy, "buying stocks is likely to work very well for you," Buffett wrote in an article for Fortune back in 2001. But when total equity value exceeds the size of the economy, it is a sign that investors are paying too much.
 
This looks like a variation of the Price/Sales ratio, a ratio usually used to compare companies within sectors. Here Buffett is using the broad market as a general indicator of the economy's health and the investor's assessment of it.

The value of all the equities in the Wilshire 5000 Total Market Full Cap Index (a proxy for the entire domestic market) stands at $26 trillion. That is 135% of U.S. gross domestic product (GDP), according to figures tracked on a quarterly basis by the Federal Reserve Bank of St. Louis.

Currently Buffett's investment company, Berkshire Hathaway, has a record $100 billion of cash on hand. (The company as a whole is valued at $449 billion).

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