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November 11, 2019

Why is Warren Buffet Still Sitting on $122 Billion in Cash?

Frank Cabibi

Since June, the Oracle of Omaha has been keeping over 60% of his cash tucked away from any institutions. In fact, the majority of his investments have gone back into his own company, Berkshire Hathaway. Since June, he has been holding back on investing and let’s talk about why.

The Wilshire 5000 Market Cap to GDP ratio has been nicknamed the Buffet Indicator after Buffet who popularized it in his use to measure the value of the market. The indicator uses two components: the market capitalization of all U.S. equities and quarterly GDP.


Here is a visual of the math:

Buffet indicator = (Market cap)/(GDP) *100

$30 trillion/$21 trillion 1.42. 1.42 * 100= 142%

Last year we stood at a market cap around $30 trillion. GDP was $21 trillion. So we’ll take 30 and divide it by 21 to get 1.42. And then multiply by 100 to get the percent and that’s 142%. However, Buffet uses the Wilshire 5000 and GDP so the number will look different from corporate equities to GDP. This year our market cap to GDP is 140.9%, exceeding the value 136.9% during the tech bubble of 2000, and it very well surpasses the value during 2007-08 of the housing crisis.

Wilshire 5000 Version

Typically, if the ratio is 75% or lower, it’s considered undervalued. And 100% and over is overvalued. There is not much of a window there, but 75% is a generous valuation. Usually 50% and below indicates an undervalued market. So we’re standing around 141% on the buffet indicator which is obviously overvalued. And I know I keep talking about this, but the longer we stay in this bull market, the more reasons I find for it to go down. From Buffet's absence of investing, to the inverted yield curve, to China, to stock buybacks inflating their prices, and to overall debt levels in US households, I think this earnings season is the only thing driving our market right now. And the fact that we’ve reached all time highs can be appealing to an investor. But just as markets reach all time highs, and investors do not see the market coming down, is usually the common tale of how people get burned on their trades.

So that’s my two cents once again. When a billionaire investor who’s made his fortunes from investing, is not investing, I feel like that should be an indicator in and of itself. I usually follow Buffet and listen to him, but I kept trading up until late September. Now I’m starting to see less and less optimism in the market. I’m sure there are other arguments on the other side that indicate the market will continue to be green for years. But as of now, I don’t see it and I do not feel comfortable putting my money anywhere but my pocket or in shorts. My opinions may change but I will need more information to tell me otherwise.

Website that provided image: https://www.advisorperspectives.com/dshort/updates/2017/09/06/market-cap-to-gdp-an-updated-look-at-the-buffett-valuation-indicator

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