Buffett’s ratio: (Total market cap of all companies listed in an economy)/(economy’s GNP)
According to Warren Buffett, this ratio is amongst the best indicators of where valuations stand in an economy. He has used this ratio very frequently (and ofcourse successfully) for predicting successful movements of markets.
The GNP of a country is a measure of the revenues of the business and the market cap is the value investors are ready to assign to the businesses. Ideally, under reasonable situations, both the market cap and the GNP should grow at a similar rate. But that’s not what happens.
As per Buffett, an astute investor buys stocks if the ratio falls below 70-80% for long term investments as markets are fairly valued. If the ratio exceeds 115%, the markets are overvalued where odds of investing are not in the favor of investor from a long-term perspective.
Came across an interesting article analyzing the Buffett’s ratio in the context of the current Indian market, where the ratio stands at 1.04.
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