Buffett Indicator: Is market expensive ?

Recently BSE/NSE made all-time high, now the question in most of the investor’s mind is, Is the Market  Overvalued?  Are the stocks expensive? Is it the time to lighten up the investments in stocks or do market have more fuel left to go further up?

Commonly most investor typically use price-earning (P/E) ratios to evaluate market valuation. But legendary investor Warren  Buffet has a different method to measure overall market valuation which is popularly known as Buffett Indicator (Stock market cap to GDP ratio)

What is Buffett indicator?

In simple terms Buffett Indicator is the ratio of Stock Market Capitalization to GDP it is a measure of the total value of all publicly traded stocks in a market divided by that economy’s Gross Domestic Product (GDP) (say India’s GDP)

Market Cap to GDP= (Value of the public stock in a company /The gross domestic product of a county) * 100

 

What is the use of the Buffett indicator?

To know whether an overall market is undervalued or overvalued or fairly valued.

How to calculate the market cap of a company and stock market cap?

market capitalization for a company is the value of a company that is traded on the stock market, calculated by multiplying the total number of shares by the present share price. Market capitalization for the Stock market is Calculated by adding  the total value of all publicly traded stocks

We don’t have to worry about calculating all this you just visit BSE website under Equity Market Capitalization. The market capitalization will be available in crores. Or in USD billions

What is GDP?

The Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time.

How to calculate GDP?

GDP = private consumption + gross investment + government investment + government spending + (exports – imports)

Where do we get this data?

We don’t have to worry we get the details in the various website

Calculating Buffet Indicator

• Stock Market capitalization as on today September 16, 2018 is say 2.3 trillion USD (not proper value)
• GDP as on September 16, 2018 is 2.848 trillion USD which is equals 284.8 lakes crores (not proper values)

As on September 2018
Stock Market cap to GDP (Buffet indicator) = 2.14/2.848 * 100 = 75.1%

2008 before market crash
Stock Market cap to GDP (Buffet indicator) = 1.2/1.24 * 100 = 102.6 % (rough values)

Buffett considers a stock market trading below 50 percent of the country’s GDP too low, and undervalued. If it trades between 75 percent and 90 percent of GDP, then the market is fairly valued. But anything above 115 percent is overvalued

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