When Warren Buffett started his investing career, he would respond to general questions about whether the stock market was overvalued or undervalued by pointing to the ratio between the market capitalization of American stocks and America’s GDP. If the market cap of all publicly traded American stocks exceeded the gross domestic product of what the nation produced (i.e. was a ratio over 100%), then the stock market would be considered overvalued. And if the ratio was below 100%, the stock market would be considered undervalued. Right now, the market cap to GDP ratio is 147%, which would historically suggest that stocks in aggregate trade at 1.5x their overall value based on Warren Buffett’s historically used benchmark.
As you may have noticed, Warren Buffett has not cited this valuation benchmark in recent years.
I suspect there are at least two reasons why.
As an initial matter, Benjamin Graham introduced the concept … Read the rest of this article!