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Warren Buffet Indicator Explained

 

Is investing in the share market currently, equal to playing with a fireball? If you want to be successful in the share market then which companies should you be opting to invest in? Mr. Warren Buffet exclaims, “It is better to buy a small carat of original diamond than to invest all our money to buy a duplicate diamond.” Recently, Mr. Buffet celebrated his 90th birthday. Mr. Buffet has taught us the important lesson of investing in this current situation. So if you too wish to know more about it, then continue reading this blog. 

 

In 1999, when the US market was in uptrend and Mr. Buffet’s company Berkshire Hathaway which invests in the shares of different companies, wasn’t performing well compared to the US index S&P 500. During this time an article was published against Mr. Warren Buffet titled, “What’s wrong Warren?”  

 

Later in the year 2000, the US market crashed miserably. At that time, Mr. Warren Buffet’s company Berkshire Hathaway was performing so well that it gave better returns than the index as well. The tables were turned this time. In 2001, Fortune magazine conducted an interview with none other than Mr. Warren Buffet. When everyone was clueless about what was happening in the market, Fortune magazine asked Mr. Buffet as per your perception what will happen next in the market? In that interview, Mr. Buffet named a single indicator, and that indicator until today is known as the Warren Buffet Indicator. Mr. Buffet said, if the share market capital of any country keeps on increasing compared to the country’s GDP then that share market is said to be expensive. Now, what does share capital mean? What is the GDP of a country? If you haven’t been through our blog on The Warren Buffet Indicator, then we have provided a link for the same below. Do check it out.

 

So when the share market capital is more than the country’s GDP, you won’t get enough chances to earn good returns there. But whenever, the share market capital will fall below the level of the country’s GDP, then at that time, you can get enough opportunities to make a good amount of money there. 

 

Mr. Warren Buffet has said that if this Market cap to GDP ratio falls between the level of 70 to 80 then you could get enough opportunities to earn excellent returns here. But if this Market cap to GDP ratio goes up to the level of 200 and you invest in the share market during that period then it is equivalent to playing with a fireball. In the year 2000, the Market cap to GDP ratio had reached the level of 139 and market had become very expensive, and thus, the market crashed. Similarly, in 2007 the Market cap to GDP ratio went up to the level of 107, and once again the market crashed. Talking about 2020, currently, the Market cap to GDP ratio in the US is at 179 and the market is very expensive, so investing more in the share market during such times is equivalent to playing with the fireball.  

 

So how do we invest in such a difficult situation? Talking of India, the Market cap to GDP ratio in India is currently at 60 which is moderately valued. But if we have a look at the Nifty PE ratio then we’ll find that the Nifty PE ratio is currently at 32.49 which means the market has been over-valued. Currently, the market is expensive. 

 

In America, their market seems to be over-valued depending upon the Market cap to GDP ratio. So in India, currently, which companies should we opt to invest in? 

Mr. Warren Buffet exclaims, “It is better to buy a small carat of original diamond than to invest all our money to buy a duplicate diamond.” So in this difficult economic situation, it is advisable to invest in companies which can perform well and grow out of this difficult situation rather than investing in any other sort of company. It is better to buy a small carat of the original diamond than to invest all our money to buy a duplicate diamond. So how can we find a diamond in this tough economic situation? 

 

We have previously discussed this in our blog on How to invest for the Long-term? Do check it out. So one such company which is good to invest in is Britannia Industries, we had discussed this company for education purposes previously as well. So you can invest in similar companies which have a sustainable competitive advantage over them. Hence, if you invest for long-term in such companies, then you can surely earn great returns in the long-term. 

 

Here, I would like to give a disclaimer/disclosure that I, my company as well as the Director Board of my company may have or may not have investment or crores in the above-mentioned companies and the above-mentioned companies are for education purposes. So before investing in such companies, it is advisable that you carry-out your risk profiling as well as analyze the risk involved therein and also, have a discussion with your financial advisor before making any investment decisions, or else you would blame us.

 

So to find out what the current Market cap to GDP ratio is, what the current Debt to GDP ratio is, and similarly, what the Nifty PE ratio is? Also, if you wish to learn trading by adjudging the market valuation along with market direction then you can download our app called Aryaamoney. Also, if you wish to increase your market learning then follow us on our YouTube, Facebook, Instagram, Twitter, and Linked-in social media handles too. 

 

If you wish to open your demat account with the leading brokers of India then, we have mentioned the link below for the same. 

 

So if you are carrying out trading or investing for the long-term, not all your decisions are going to be right. So if we properly analyze and trade or invest, then whichever of our predictions prove to be right, we’ll earn a good profit there. Also, if we invest for long-term in great businesses then Mr. Benjamin Graham, mentor of Mr. Buffet says that” Mr. Share market will keep you updated about the prices of the shares you have invested in regularly which maybe sometimes up and sometimes down, but the business in which you have invested, has great value then whenever the market tells you that the price of that share has fallen, it is an opportunity to invest more over there. Mr. Warren Buffet has quoted, “In the long-term, the share price follows the business if the business keeps on growing.” 

 

Until our next blog…

 

Happy Trading, Happy Investing!!!

 

 

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