8/18/15, 8:16 PMBuffett valuation says stocks overvalued - Business Insider

Page 1 of 5http://www.businessinsider.com/buffett-valuation-says-stocks-overvalued-2015-8

REUTERS/Shannon Stapleton

Warren E. Buffett

Warren Buffett's favorite valuationmeasure says stocks are overvalued

KYLE CALDWELL, THE TELEGRAPHAUG. 18, 2015, 8:44 AM

Afterenjoying sixyears ofstrongreturnsfrom equitymarkets,increasingnumbers ofprofessionalinvestorsarebecomingmorebearish andtakingmoney offthe table.

ShouldBritishinvestors follow suit? Perhaps so, according to one valuation measure.

8/18/15, 8:16 PMBuffett valuation says stocks overvalued - Business Insider

Page 2 of 5http://www.businessinsider.com/buffett-valuation-says-stocks-overvalued-2015-8

There are plenty of different ways to ‘value’ a market. The four most basic and widely used –price to earnings, Cape, price to book and dividend yield - are explained here. TelegraphMoney's stock market map has compared these main measures of value against long-termaverages.

But it could also pay to look at a less familiar measure - one used by the world's most famousinvestor, Warren Buffett.

It calculates whether the value of a country’s stock market is worth more or less than itsannual economic output.

A figure of over 100pc suggests the market is overvalued, while those that score below 50pcare considered a bargain.

It is a simple and rather blunt measure. The logic, however, is sound - that the companies ina country, in general, will not be able to all outpace economic output of that country for long.

In an interview with Fortune Magazine in 2001 Mr Buffett said: “It is probably the bestsingle measure of where valuations stand at any given moment. And as you can see, nearlytwo years ago (before the tech crash) the ratio rose to an unprecedented level. That shouldhave been a very strong warning signal.”

How does the measure value global stock markets today

AJ Bell, the broker, crunched the numbers for the 14 biggest global economies, to find outwhich countries are overvalued, neutral or cheap.

The results, detailed in the chart below, show that America and Britain are the mostexpensive stock markets.

At the other end of the table Russia, India and Brazil are deemed the three cheapestcountries to buy today.

8/18/15, 8:16 PMBuffett valuation says stocks overvalued - Business Insider

Page 3 of 5http://www.businessinsider.com/buffett-valuation-says-stocks-overvalued-2015-8

The Telegraph

It is worth pointing out that the measure has some critics. They argue that large businesses,particularly those listed on developed stock markets, often make more of their moneyinternationally than in their domestic market.

So it can therefore be misleading unless you also compare the market's valuation today withits own history.

But even allowing for this, the test shows both America and Britain to be expensive. TheWilshire 5000, the US index viewed as the fairest to use because it is home to the mostcompanies, has never been more expensive.

It scores 133pc, much higher than previous peaks in 2000 and 2007, of 112pc and 104pcrespectively.

8/18/15, 8:16 PMBuffett valuation says stocks overvalued - Business Insider

Page 4 of 5http://www.businessinsider.com/buffett-valuation-says-stocks-overvalued-2015-8

The Telegraph

Britain’s FTSE All Share index valuation is also high by historic standards, at 124pc.Although this is marginally below its 133pc peak in 2000.

Russ Mould, of AJ Bell, said: “The data suggest that if corporate profits do come underpressure (owing to a recession, for example) then the US and UK markets could be leftlooking a bit exposed on the downside.

“According to Mr Buffett, once profits rise above GDP investors need to be careful. Thismakes sense as very few firms manage to make supra-normal returns for long: either thecompetition catches up with them, the customers revolt and demand lower prices or theregulator intervenes.”

8/18/15, 8:16 PMBuffett valuation says stocks overvalued - Business Insider

Page 5 of 5http://www.businessinsider.com/buffett-valuation-says-stocks-overvalued-2015-8

The Telegraph

How investors can profit

For investors who aren't scared off, the simplest and cheapest way to invest is via trackerfunds.

These are available for many markets around the world from companies such as Fidelity,Vanguard, SPDR and iShares.

The last two specialize in “exchange-traded funds” or ETFs, which are traded on the stockmarket just like a share. For the major markets you can pay a total annual charge on atracker of 0.1pc or even less.

More: Warren Buffett Stock Market The Telegraph