By Eric Fry
Betting against Warren Buffett is usually a bad idea. But that’s exactly what one legendary hedge fund manager is planning to do… and that bet just might be a very good idea.
We wrote last week about the “Buffett Indicator,” which measures the ratio of U.S. stock market capitalization to U.S. GDP.
According to this ratio, U.S. stocks are trading at their highest valuation of the last 68 years. Despite this fact, Warren Buffett is offering to wager that buying U.S. stocks today will produce a better investment result than buying an index of hedge funds.
The man would appear to be betting against the indicator that bears his name… and against history, as shown in today’s chart. Perhaps that’s why the legendary hedge fund manager Mark Yusko jumped at the chance to accept Buffett’s wager.
I expect Yusko to win this one!
From Extremely Expensive to Super Extremely Expensive
Apparently, Buffett now believes that stock valuations will increase from extremely expensive to super extremely expensive.
That is literally the bet he is making… and that bet is dripping in irony.
“Buying low” is a big part of the reason why Warren Buffett is a billionaire. Throughout his career, he has not only identified excellent companies over and over again; he has also identified excellent moments to invest in those excellent companies over and over again.
He invested opportunistically. He “bought low.”
Given that history, and the fact that U.S. stocks are richly priced, Buffett’s newest wager is a bit of a headscratcher… and so is this comment he made on CNBC last week: “[The S&P 500] will absolutely kill every one of the fund of funds [over the next 10 years].”
According to the Buffett Indicator, U.S. stocks have reached their richest valuation level of the last 68 years. Buffett did not invent this valuation gauge, he merely praised it publicly. Back in a 2001 interview in Fortune, Buffet lauded this indicator as the “the best single measure of where valuations stand at any given moment.”
It has been called the Buffet Indicator ever since.
According to this “big picture” valuation gauge, a stock market is relatively cheap whenever its market cap drops well below 100% of GDP. Conversely, a stock market is relatively expensive whenever its market cap climbs well above 100% of GDP.
At the stock market lows of 2009, for example, the market cap of all U.S. stocks plummeted to less than 60% of U.S. GDP. But today, the U.S. market cap totals a whopping 148% of U.S. GDP, which is more than double the average readings of the last 68 years. Today’s 148% reading is also the highest level this metric has ever reached during the last 68 years.
In other words, stocks ain’t cheap.
When stocks become this pricey, good things rarely happen. That’s a fact, as today’s chart illustrates. Each year on the chart displays two lines:
The Buffett Indicator reading for that year
The S&P 500’s total return during the following 10 years.
For example, in the chart at the top of this article, the blue line …read more
Source:: Investment You
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