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Two Times Normal

Two Times Normal

| May 16, 2024

I came across a really great quote yesterday.

 “Everyone is a Warren Buffet, until it’s time to do Warren Buffet stuff.” ~Rey Descalso, 2024

I’m partial to it because I wrote it. Warren Buffet is the original gangster of Omaha.

What I didn’t come up with is the Warren Buffet Indicator (WBI). It’s elegant in it’s simplicity and brutally obvious in hindsight.

Take the Total Stock Market Value and divide it by the Gross Domestic Product. Think about it for a moment. If the stock market is growing slower than the economy, stocks are a fair value and we should buy some more. If the stock market is growing faster than the underlying economy, perhaps we are paying too much for shares of that store where you buy video games in the WalMart Plaza. It rhymes with LameSlop.

Here's what it looks like for you algebra nerds:

                Total Stock Market Value

WBI=       Gross Domestic Product

In 2001, when we were in silly goose bubble territory the of about 150%. The next two years were a brutal market correction.

As of March 31, 2024 here are the numbers:

                 $55.84T

WBI=        $28.28T = 197%

 

To be fair, the WBI historical trendline is bent upwards thanks to inflation and innovation and mom and apple pie. So if you compare the WBI to that historical trendline you get a good feel for where we are from a valuation standpoint:

Source: www.currentmarketvaluation.com 

The key is Standard Deviations. Which is an oxymoron like Jumbo Shrimp. Essentially, there is a standard amount of wiggle room. But, like 2001, we are at two times normal. I've always been told to act more normal. You would think therefore that two times normal is double good. Unfortunately, it's not.

Now I’m not saying the end of the world is tomorrow. Stocks can climb higher than you ever imagined and plunge lower and for longer than is rational. That’s why we lean on technical analysis with only a pinch of fundamentals for flavor. But looking at the stock market history through this lens gives you a sense of where you are today.

So what would Warren Buffet do if he were you? Probably book a call with me. Or not, hard to say, since I've never met him. If you’d like to discuss where you are today and where you’d like to be in retirement, click here.