Dear Reader,
The market’s been going higher pretty much every day, a couple hundred points a day.
It’s just been marching higher.
So, some of you have been asking, “what do you think of the stock market? Is it overvalued?”
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I always imagine the market moving up like a train - chugga chugga, chugga chugga - just going higher.
I always love when you’re in a nice, strong market.
And there’s a lot of cause for optimism…
This Big Beautiful Bill, despite some of the negatives we’ve talked about, is also very positive.
I was listening to AT&T’s earnings report.
CEO John Stankey is doing a great job over there.
And he says because of the Bill’s tax incentives, they’re going to invest more and sooner in building out America’s fiber infrastructure.
They’re also going to put money into bringing up their pension plan’s retirement funding from 90% to 95%.
That’s a very positive sign and I’m very optimistic about that.
The President announced trade deals and we’re going to get specifics on that.
Still, a lot of folks have asked me, “what do you think of the stock market? Do you think it’s overvalued?”
And I’ll tell you something…
They once asked Warren Buffett the best indicator of stock market value he’s ever used, and he said basically, “market cap to GDP.”
The market cap of the stock market to total gross domestic product.
And we have in the U.S. right now, basically, a $30 trillion a year economy - GDP.
So what he’s saying is our market cap in relation to that $30 trillion is the best indicator of whether a market’s overvalued or undervalued.
We call it “the Buffett indicator” and this has been a very big thing on Wall Street.
I remember learning it when I was studying for the CFA.
I was in the CFA class and I was talking to this girl, a super brain who worked for Carl Icahn’s office, and she’s the first one who taught me about this 25, 30 years ago.
I remember saying, “wow,” and I’ve watched it ever since.
The Buffett indicator, if you actually look back, it’s spot-on as a general indicator.
It doesn’t tell you when something’s going to go down.
It tells you when something’s overvalued or undervalued.
But it’s not going to tell you the exact date a market’s going to crash. It’s not that kind of thing.
It just tells you if the market’s overvalued or undervalued, and believe me, things can stay overvalued or undervalued for years at a time.
I have seen it firsthand.
That’s why I don’t short stocks.
I remember the Chairman of Lowe’s shorting stocks during the dot-com boom…
He started shorting stocks in ‘97, ‘98, ‘99 and he was right - the market was overvalued.
He lost billions of dollars even though he was right.
Because he was right on the fact they were overvalued, but wrong on the timing.
So this is the reason I never short stocks.
So, where are we now with the Buffett indicator?
How concerned should you be?
I’ll tell you something…
Right now, the U.S. economy, our GDP, again, is around $30 trillion…
And the “Buffett indicator” is at a record 210%.
The stock market has a complete market value of about $63 trillion, which is more than double our GDP.
Now, Buffett would say a stock market is cheap when it’s about 70%-80% of GDP.
So if GDP is $30 trillion, we’d see a stock market of about $21-$24 trillion. That would be cheap. It’s about triple that right now.
It was overvalued in 2007, before The Great Recession.
It was overvalued at the peak of the internet boom in the nineties, right before the dot-com bust.
But right now it’s the highest it’s ever been.
Look, as you go through life as an investor, you’re going to find that groupthink is a very big deal.
It is so seductive to think to yourself, “this market’s going higher, this market’s going higher.”
The discipline is to be patient.
To be able to sit with cash and wait for opportunities; not to get caught up in the euphoria.
That is a hard thing to do.
I’m not saying I’m completely out of the market and I’m going to sit there sucking my thumb waiting for the market to crash.
That’s just stupid.
But I am sitting on cash.
And I do wait to pick my spots.
And I don’t really get caught up in the euphoria. Which is very difficult.
Look, at the highest level, this game is a mental game.
Investing is a competition against yourself.
It’s based on your ability to keep your cool, to keep things in perspective. To not get emotional. To not get caught up in the hype.
That’s what good investing is all about.
Indicators like this one are very helpful, because it really shows you how euphoric people are and how untethered to reality that is.
Now, does that mean we’re not going to pick our spots, and take our wins and play the game?
Of course we’re gonna play the game.
Again, we’re not in the “sitting at home sucking our thumbs” business.
We are here to play the game!
But we’re not going to play stupidly.
We’re gonna swing for pitches that are in our strike zone.
We’re not going to swing in the dirt. We’re not going to swing high or swing low.
We’re going to stay focused on pitches in our strike zones and go for base hits.
In a market like this, you’re going to see a lot more base hits than home runs.
The home runs have been extracted out of this market for the most part.
But we’re going to keep looking for them.
And we have found some.
Look at Breakthrough Wealth - we’re just killing it.
So anyway, this is what I wanted to discuss today.
The Buffett Indicator.
That was really a Wall Street term.
We started using it in our content and our marketing at Behind the Markets, and now I see everyone’s kind of using it.
So I figured I’d just talk about it here so you’d get a little “valuation check” on what the market looks like here.
We are now significantly overvalued, at the highest level we’ve seen in our history.
And usually, again, it doesn’t tell you when the market’s going down - but it flashes:
“Warning - market’s overvalued - warning - system’s overheating - warning.”
But it doesn’t tell you when the engine’s gonna blow up.
So anyway, that’s all I have. Have a wonderful Thursday. I’ll see you tomorrow.
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