Editors note: In this excerpt, Doug Short explores different ways to calculate the “Buffett Valuation.” His conclusion: Stock prices, when compared to GDP, are pretty “frothy.” And yet, Short warns the Buffett Valuation Indicator isn’t very good for market-timers (see chart, below).
Market Cap to GDP is a long-term valuation indicator that has become popular in recent years, thanks to Warren Buffett. Back in 2001 he remarked in a Fortune Magazine interview that “it is probably the best single measure of where valuations stand at any given moment.”
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