Warren Buffett’s Favorite Indicator
Back in 1999, I was young and dumb and chasing the mother of all tech booms. You could toss money at anything and make more of it. If I remember correctly, and I do, my total portfolio returned 110% that year. It was easy money.
At the time, Warren Buffett was going on about never buying tech stocks. Who was this guy missing the biggest bull market in history? I thought this guy was past his prime.
Two booms and busts later, my thinking has changed. Buffett kept his money out of the dot-com boom. But he bought heavily in 2000 and 2001 and again in 2009. He nailed the bottoms and that’s where he makes his money.
Back in the late ’90s, Warren Buffett was saying he had nothing to buy, as the entire market was overvalued and tech investors had lost their minds.
Of course, Buffett is the world’s greatest and most famous investor, and when he does say something, you have to pay attention. More recently, he said, “Not enough good companies were available to buy at reasonable prices” and warned of “Casino-like behavior” in the current market.
He has been selling stocks like Apple and Bank of America and is hoarding cash. He has the largest cash position ever at Berkshire Hathaway (BRK.B)
Warren is going to cash because what he has called his favorite indicator is showing an overbought market. When the stock market to Gross Domestic Product ratio is above 100% there is usually a correction.
Here is the chart today:
I’m not saying that the market will crash tomorrow. Trends can last a lot longer than you think. It wouldn’t surprise me if this bull market keeps going.
Twenty-five years ago, before the dot-com bust, the S&P 500 had a P/E ratio of 35. Today it is at 30.5 which is getting up there. Price to book value is at a 25-year high of 5.25. Price to sales is also at a record 3.14.
What is Buffett buying? Last year he increased his shares of Domino’s Pizza(DPZ), Sirius XM Holdings (SIRI), and Occidental Petroleum (OXY).
OXY has a PE of 13, a PS of 1.78, and a PB of 1.79. Like most stocks in the oil and energy sector, it is undervalued.
All the best,
Christian DeHaemer
Outsider Club
That’s a lot of money:
https://www.outsiderclub.com/half-a-trillion-for-ai/
GE in Space:
https://www.outsiderclub.com/space-race/
Oil:
https://www.outsiderclub.com/drill-baby-drill/
