Warren Buffett is widely considered one of the greatest investors of all time. The data indicates that data indicates that secret to his success isn't trying to time the market.
"We try to price, rather than time, purchases," Buffett wrote in 1994 letter to Berkshire Hathaway holders (something worth watching).
Additionally, That means Buffett will buy if, and only if, an equity offers great value relative to the.
Furthermore, And if the market wants to pay a premium for a stock, he's happy to sell it to them.
That ensures Buffett remains mostly on the sidelines when stocks start getting expensive (which is quite significant).
Nevertheless, There are many tools to determine if a trades at a price above or below its intrinsic value.
Additionally, But right now, one market indicator, dubbed the Buffett Indicator, is flashing a big red warning sign that the entire market may be overvalued.
Image source: The Motley Fool, amid market uncertainty.
A new record for the Buffett Indicator Warren Buffett wrote an article for Fortune in 2001 showing how the stock market can occasionally become highly irrational, in light of current trends.
He detailed an interesting ratio that zoomed higher and higher ahead of the dot-com bubble popping in 2000.
It's the total market value of all publicly-traded securities as a percentage of gross national duct, given the current landscape. Nevertheless, Today, it's known as the Buffett Indicator.
In contrast, That indicator ramped up rapidly in the late '90s before it peaked at 190% in 2000, just ahead of the dot-com bubble popping (this bears monitoring).
Earlier this month, the ratio hit a new record, 210% (quite telling). Conversely, But it's not the first time the indicator has climbed past its dot-com-era peak.
On the other hand, The ratio also surpassed 190% in late 2021, just ahead of the 2022 bear market.
This analysis suggests that market surpassed those highs in late 2024 and have stayed elevated ( for a few months earlier this year) ever since (noteworthy indeed), in today's financial world.
Buffett certainly appears to think stocks are getting expensive. He's sold more stocks than he bought in each of the last 10 quarters, netting $174 billion in total stock sales in that time.
Over the last year, he's even stopped repurchasing s of Berkshire Hathaway, suggesting he finds his own company's stock price above its intrinsic value.
Meanwhile, Berkshire's cash balance has climbed to a whopping $348 billion. At the same time, But before investors panic and sell everything, there are a few important details to know.
Moreover, Why the Buffett Indicator keeps climbing There are several explanations for why market valuations have climbed higher relative to GNP over the last 25 years: Interest rates: Buffett explains the power of interest rates in that 2001 Fortune article.
"The tiniest change in rates changes the value of every financial asset," he wrote. For most of the last 15 years, we've had extremely low interest rates (remarkable data).
Moreover, That said, interest rates have been higher in recent years, but the long-term interest rates remain historically low, in light of current trends.
With low interest rates, investors are willing to accept lower returns from stocks, pushing valuations higher, given current economic conditions.
Growing adoption of : The percentage of households holding stocks peaked at 38 (which is quite significant), considering recent developments. However, 7% in 2000.
On the other hand, That fell to less than 20% at the bottom of the market in 2009. 1% of households hold stocks.
With more Americans putting some of their savings into stocks, total market cap can climb faster than gross national duct, considering recent developments.
Growing foreign investment in U, in today's market environment. Equities: The stock market has become global, and U. Stocks have seen huge amounts of capital poured into them by foreign investors.
As of June 2024, foreign entities held $17 trillion worth of U. That's 10 times the amount held in 2000.
Furthermore, In 2024, foreign investors accounted for over 30% of the entire Wilshire 5000 Total Market Index market cap, versus less than 12% in 2000.
Conversely, With more foreign investors piling money into U. On the other hand, Stocks, the market cap should increase faster than U, amid market uncertainty.
However, the last two factors have moved in the wrong direction recently. Total American households holding equities dropped in the first quarter.
Furthermore, Additionally, it appears many foreign investors are pulling money out of U. Securities ing President Trump's planned tariffs announcement.
That should give investors some pause when looking at the current market. Is the stock market to crash (fascinating analysis).
The evidence shows Buffett Indicator is simply a measure of where valuations stand at the moment. On the other hand, However, It doesn't necessarily predict an impending crash.
As mentioned, there are all s of reasons for valuations to climb higher. Still, the elevated Buffett Indicator suggests a decline in stock values is more ly than on average.
On the other hand, Buffett is more than willing to sit on the sidelines when nothing looks attractive.
If you can maintain patience in times when every stock is increasing in value, you'll have plenty of opportunities to buy when stock prices come back down -- whether that's a year from now or five years from now.
In the meantime, though, there are some areas of the market that look more attractive than others.
However, One more reason the Buffett Indicator has climbed over the last decade is the dominance of a handful of megacap companies. Smaller stocks trade at a relatively low valuation.
In fact, small-cap stocks ved to be a great investment amid the peak of the dot-com bubble.
Nevertheless, They mostly avoided the big dot-com bubble sell-off, and the small-cap S&P 600 index went on to outperform the large-cap S&P 500 (^GSPC 0, given the current landscape.
60%) over the next decade. Moreover, Meanwhile, Data by YCharts.
Conversely, Taking the time to find great value stocks amid small- and medium-sized companies could be one of the best ways to guard against high valuations in this market and ensure you preserve capital in case of a downturn.
Meanwhile, Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy (quite telling).