I look at the above chart, and it does not suggest the market is particularly cheap — its cheaper than ti was, but the 1940s were much cheaper, as were the 1970s and early 80s.

Here’s the excerpt from the Fortune column:

According to both this 85-year chart and famed investor Warren Buffett, it just might be. The point of the chart is that there should be a rational relationship between the total market value of U.S. stocks and the output of the U.S. economy – its GNP.

Fortune first ran a version of this chart in late 2001 (see “Warren Buffett on the stock market”). Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.

But he visualized a moment when purchases might make sense, saying, “If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you.”

Well, that’s where stocks were in late January, when the ratio was 75%.”

And how is that buy working out so far ?


Buffett’s metric says it’s time to buy
Carol J. Loomis and Doris Burke
Fortune, February 4, 2009: 9:49 AM ET


Category: Investing, Markets, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

51 Responses to “Buffett’s Buy Metric”

  1. leftback says:

    We are getting close to a lot of buy triggers going off. If we see a poke down below SPX 810 tomorrow a lot of people may finally come in. Even more if we tickle 760.

  2. Ben says:

    Whenever Buffett is either buying or not buying, he is first considered by pundits to be wrong because of what is happening/has happened just recently. Yet he is always vindicated and I suspect this time won’t be different. Buffett measures returns in years and not a few months. Perhaps we’re not at a secular bear-market bottom, but we’re also at a level that affords decent long-term returns. There is also this thing called globalization that would argue that as a level of GNP, stocks should be worth a lot more than historically because a huge portion of businesses traded in U.S. stock markets have global businesses. This was not the case in the 1970s or 1940s. At the end of the day I’d much rather do what Buffett is doing than the opposite.

  3. Keith - Hermosa says:

    Buffett is thrown into the dustbin at bubble peaks, and called out of touch for not buying 90 p/e stocks. When all hell breaks loose he becomes Wall Street’s “What would Jesus invest in,” surrogate. Pathetic. It’s too bad he hasn’t protected his name in court so slimy publications like Fortune could be sued for trying to con Americans into buying stock with out of context decades old quotes.

    Buffett should tell Americans not to read Fortune or watch CNN if they want to be successful investors. I wonder if that quote would be given any coverage.

  4. jmborchers says:

    When you have more money than Buffett then you can critic.


    BR: What a terribly ignorant thing to say. First off, I was criticizing the analysis, and not the man. And secondly, no one in this country should be beyond fair-minded criticism.

    I heard the exact same bone-headed, foolishness when I criticized Bruce Sherman’s newspaper purchases a few years ago. The trades turned out to be jumbo money losers for the Sherman wannabes that blindly followed his bad bets.

    In Investing, there is no place for star-fuckers or groupies, including Buffett.

  5. Mannwich says:

    Here comes our rally on smaller “bad bank” plan. Ho hum.

  6. IOW, the criticism of this is: “well, you _could_ buy now, but prices are probably going to be lower.”

    Fair ’nuff, but I don’t see that Buffett’s wrong, only that folks with a higher risk tolerance are waiting for 1940s/1970s territory. Smacks slightly of pedantry if you ask me…

  7. wally says:

    Patience, patience.

    Buffett certainly has a fabulous record from years ago, but nobody is perfect. Over the last decade you’d have been as well off with a nice 6% CD. And if Buffett had forseen the last year’s carnage he could have gone more to cash and basically made 40% on it… becausue that’s how much bigger his cash would look right now.
    It is fine to talk about the ‘long run’, but sometimes people who saved money need to use that money and what they get when they cash out their investments is today’s price. If they bought BRK at $140,000 and sell at $90,000, they got hosed. But, of course, we don’t tell THOSE stories, right?

  8. Mannwich says:

    Exactly Wally. If we all had anywhere near Buffet’s dough, we could afford to think “long term”. Unfortunately those of us in the real world don’ t have unlimited amounts of cash to throw at the market to fix prior investing mistakes……

    It’s like comparing the Oakland A’s to the Yankees. The A’s and their limited resources can’t afford to make ANY mistakes in order to have a decent shot at competing with the Yankees, who have unlimited resources so that a monkey could basically be GM of that team.

  9. JohnnyVee says:

    The chart would indicate that the market will go down as much as it went up. If so, we have a long ways to go.

  10. Broken says:

    Even Buffet doesn’t have “unlimited money”. He just always keeps some of his powder dry. Anyone can follow the same proportionate strategy, but most don’t have the discipline to. It’s hard to buy when everyone is headed for the exits and sell when the “sky’s the limit”, even when you know it’s the right strategy.

  11. Bob_in_MA says:

    Buffet looks so smart because so many on Wall St are so incredibly stupid. But it seems to me, he has let his thinking get a little warped by easy money in financials over the last 30 years. He may not look so sage if his bank stocks evaporate and insurance portfolios continue to take a beating.

    I don’t see how anyone can look at that chart and make the assessment:
    “If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you.”

    Maybe IF you were buying in that range during an UPTREND. It sure looks to me like this is a downtrend.

    But at least Buffet is a decent guy, which is more than you can say about 99% of the people they trot out.

  12. jimcos42 says:

    I think the distinction here is between the possibility of a decent intermediate (2-7 year adavance) and the likelihood that we’re somewhere near a one-or-twice in a lifetime secular buy zone. I’d agree with the former, but are nowhere near the latter. Other similar comparisons come mind: CAPE and Tobin’s Q.

    These kinds of measures have come down from historically high levels to a place where one could assert that equities are “fairly valued.” Perhaps, but eventually markets go to extremes. And it’s no different this time.

  13. harold hecuba says:

    BUffet? let’s be serious. this is the largest insider trader the world has EVER known. his connections throughout gov run deep. let’s take a looksie at how buffet’s investment are doing. hm well since he claims derivativs are weapons of financial destruction what does the old man do but go out and sell puts on various indices. the s+p puts were struck at levels well above 1300. my guess is he is down well into the mid teens in billions. does he get a margin call like other trading firms of course not. his endorsement of the financials was simply horrid and pathetic. how’s the great WFC investment doing. the only reason this mothball is in double figures is because the geezer owns it. how bout king parasite goddamn sack.

  14. Mannwich says:

    @harold hecuba: No kidding. It also helps a little bit (no, a lot) to have the game rigged in your favor by your pals in the government. Ditto for Bill Gross at PimpCo.

  15. Barry Ritholtz says:

    Some Buffett buys performance over the past 6 months:
    (All holdings are as of September 30, 2008)

    Moody’s (MCO) down 39%
    Wells Fargo & Company (WFC) down 48%
    American Express Company (AXP) down 56%
    US Bancorp (USB) down 53%
    Bank of America (BAC) down 85%

    If I go back a year its even worse.

    Look, I am not saying he has not been a terrific investor over his career– he has — but he makes mistakes, including some jumbo money losers.

    Make your own decisions and stop blindly following others.

  16. constantnormal says:

    I think it mainly shows the degree to which Warren Buffett adheres to his investment philosophy. He knows he cannot predict the future, and simply tried to “buy low”. If he always waited until valuations were at the levels of the 1940′s or the 1980′s, he would not be buying most of the time and would instead be letting cash pile up.

    By picking the valuation ranges that he has, he is able to re-deploy cash and make better returns than if he had waiting for the rock-bottom bargain levels over the years. I suspect that as we descend to the previous lows, with stocks valued at less than 50% of GDP (which is going to be a big step down, considering how much the GDP is contracting), Warren is going to be buying companies like there is no tomorrow. With business conditions becoming ever more harsh, it should be relatively easy for him to pick out the obvious survivors that fit his criteria of businesses worthy of investing in.

    Warren Buffett doesn’t buy to trade, he buys to build a valuable asset base. If he happens to start buying early in times like this, he’ll make it up in the long run — or at least the Berkshire Hathaway stockholders will.

  17. baddriver says:

    looks like we’ve still got 25% more to go on the way down :)

  18. super_trooper says:

    Looks like the period 1994-2008 was an outlier. It pulls your average line upwards. We will probably never return to that type of investment climate. If we remove these outliers, we would observer that the average is around 60 of stock market valuation to GDP. Wait for another 20% drop in the stockmarket until it’s time to buy or wait for the GDP to go up 20%.

  19. ben22 says:

    Am I wrong or did WB buy BAC around Nov. 07?

    I thought I remembered that but maybe someone can correct me.

  20. Jim Bob says:

    Ben has it right. The metric ( market cap of U.S. stocks as a percentage of U.S. GNP) might have been useful in the past, but not any more. A considerable part of the sales and profits of U.S. public companies is now based on business outside the U.S. (Anyone have a ballpark on these numbers?) At the same time, an increasing portion of U.S. GNP is generated by non-U.S. companies. For making historical comparisons, how do you adjust for that?

  21. JohnDoe says:

    @harold hecuba…You have Buffet all wrong. True his connections and size has helped him tremendously in recent years but he has been succesful since his twenties. He bought his first stock before he was a teenager and that was succesful. When he said derivatives were financial weapons of mass destruction he wasn’t speaking of options and futures. He was speaking of the more complicated swaps. If you read his annual letters you see that he began to liquidate derivatives in a subisidiary of Berkshire back in about 2001 (I think). He has been buying and selling options for a long time.
    And to others who have suggested that it his because of his large cash that he can afford to sit around on investments (that seem to be wrong) take a look at his younger days. When he only had $3000 to his name he still had the same investment strategy. People who just read headlines have Buffet and his way of thinking all wrong.

  22. constantnormal says:

    I can see a couple of possibilities from here.
    Possibly …
    a) the confluence of a lack of other places for money to go and the ginormous fire hose of liquidity that the Fed is spraying across the economy (OK, across the banks, it’s possible that a few tens of billions might slip through to the economy at large) will lead to stocks rallying back to parity with the GDP (which might not be much of a rally, considering how rapidly the GDP is contracting), only to take the third step down in the 2013-2015 time frame, reaching the sub-50% of GDP level in some future economic calamity (US Treasury defaults? Who knows?),
    or …
    b) we could continue on down from this point, which would be a REALLY rough ride from an equities perspective, due to the Incredible Shrinking GDP.

    And there are doubtless other possibilities.

    Anyone who thinks they have a lock on the future, can step right up and put all their chips on the red or black numbers of their choosing. Good Luck with that.

  23. bonghiteric says:

    A couple observations: 1 – Buffet made this observation in 2001. So this whole premise is seven years out of context. 2 – Buffet also relies on the discount rate. It is currently at historic lows.

    While cheap money isn’t going anywhere anytime soon, I would argue that intermediate to long-term profitability for corporations is extremely challenging. I think Warren would agree that 70%-80% is the new 133%.

    BTW does anyone actually read the full piece before commenting?

  24. GB says:

    GNP can only go up like housing prices !

    Seriously is GNP gowing to slow as well or globally for that matter?

  25. anniecat says:

    I would be very interested to know how that Market/GNP ratio held up in Japan over the past 30 years?

  26. Ventura2012 says:

    aggressively shorting mickey mouse and xom on this rally no brainers here.

  27. constantnormal says:

    @ JIm Bob 1:27

    ” … an increasing portion of U.S. GNP is generated by non-U.S. companies. For making historical comparisons, how do you adjust for that?”

    No way to do so in a quantitative sense, that I can see, at least not without a lot of work reconstructing that chart from Fed data to account for imports and exports — but that’s not to say that we can’t make some other observations …

    If we assume that non-US companies are not doing any better than domestic US companies, at least in so far as their US operations (and that would seem to be the case, with Toyota and Honda being only a little better off in terms of sales than GM and Ford, closer when you take account of currency translations), then we can say that the ratio of stocks-operating-in-the-US to the US GNP is a lot higher than shown on the chart above, leading one to the perspective that we might well have much further to fall, especially if global trade collapses as it threatens to do, dissolving in a wave of tariffs and trade barriers.

    There is also the question of how much of US companies’ revenues/profits are coming from outside the US, countering the impact of the foreign companies that are not included in the US stocks measured in the chart.

    I think there is a reasonable case to say that these two factors go a long way toward canceling each other out, with the end result being that the chart in question is probably a lot closer to reality than one might imagine when first confronting the impact of globalization and the flattening of the nation economies into a more-or-less global economy.


  28. Andy Tabbo says:

    Notice the lack of Warren Buffett on CNBC. At least he has the good sense to know he was Jumping the Shark in 2006-2008 with all those fawning interviews with Beckie Quick/Liz Claman, his financial gal pals.

    Market bottom gets put in when Berkshire does a cash raise “because of adverse performance on investments” and “difficult market conditions.”

    In every great, great bull market, the Icons of the previous bull market usually get completely washed out and lose huge sums of money. Vicious bears take almost everybody out.

  29. ben22 says:


    Nice call on the 10 year, and TBT the other day, moving down as predicted but I’m still thinking it will trend lower and I’m leaving my next entry on that where it is, I have a limit set up ~40. I could see some money flowing into the bonds tom. off some “worse than expected” numbers.

    Do you really think Buffett was one of the icons of the last bull market (03-07) or does that not really count as a bull mkt in your book and you are referring more to the longer term bull of 82-07?

  30. AndrewShaw says:

    I hate Buffett, mainly because of all the commentary about Buffett. I just don’t want to hear about him from all the armchair Buffett watchers. “Buffett does this” “Buffett says that” It was hilarious a last year when the “Buffett Rumors” would spread on the NYSE and get reported, “Buffett is gonna buy this bank or that bank”, what a joke.

    When was the NYT Buffett buy editorial, 3 months ago?

    No one makes money forever and his day will pass too.


    I wish I could short DIS, but then I couldn’t go back to my own happiest place on earth(rule of shorting #1: you can’t shop or support that which you short). So I have a buy order in at 17.00, if I get the stock, it’ll keep falling, what’s your target$?

  31. Sam_Deprist says:


    wouldn’t it be nice to add the same graph for Total bonds/GDP and even (forgive me) (Total derivatives + bonds + stocks)/GDP. This would highlight our bubbles as they are. After all, total value of all markets is a true measure, not of components.


  32. Andy Tabbo says:

    ben22. yes, i’m referring to the large bull market from 1982 to 2000. Most technicians believe the bull market ended with the dot com mania in 2000. I would consider anyone referred to as “the Oracle” as an Icon.

    in re: Ten year note futures. The march futures held a nice level yday, the exact 38.2% of the recent large up-leg. On the continuation charts, it held a nice “classic charting” support level. I’m no bull on the U.S. debt, but I think we’re due for a decent little bounce. When the Najarians start talking about “all the money pouring into the TBT”…it makes me want to EXIT any such trades. Pete Najarian is a baffoon.

  33. Ventura2012 says:


    I am looking for a quick move to $16…I dont short what I like to patronize either…cost me a bundle not shorting cmg.

  34. mitchn says:

    WTF?! After the biggest credit bubble in history there’s gonna be no overshoot on the downside? Has Buffett repealed the laws of physics, too? I’ll let Warren try to catch the falling knife; he can afford a good surgeon.

  35. ben22 says:

    C’mon AT, you don’t like the bald top with the long pony-tail accent?

  36. leftback says:

    @ben22 and @AT: Agreed, I am with you all the way on Treasuries – expecting a bounce in TLT tomorrow on the jobs data – holding on to cash and waiting for a re-entry into TBT, although I might get in before 40.

  37. I-Man says:

    @ AT:

    “When the Najarians start talking about “all the money pouring into the TBT”…it makes me want to EXIT any such trades. Pete Najarian is a baffoon.”

    You crap me up dude… is that where all these brokers are hearing about TBT?

    I’ll stick to my homegrown… YCS that is! :)

  38. mrdknight says:

    Everyone commenting on US companies having global businesses and foreign companies doing business in the US has it all wrong IF this chart is really based on GNP. Usually today we measure stuff in GDP (what is produced in the US), and if this is GDP then yes those corrections would be needed. But GNP isn’t measuring domestic production, it is measuring the production of US assets (including their overseas sales).

    My big beef with the chart is that it looks only at the equity value of publicly traded companies, rather than the total value of US companies which would need to include (a) corporate debt and (b) the value of privately held companies. Increasing leverage would tend to goose the result (lower market cap for the same product). And a shift to more privately held companies would also goose the result (same product but the company isn’t counted in the market value of stocks). Anyone know if either of these things have happened in the last 30 years since the LBO industry was invented… OK, rhetorical question.

  39. wally says:

    The other thing to always remember about Buffett is that there were 2 members of his successful act (and I don’t mean Munger). Buffett and the economy. He bet that the economy would have a rising, optimistic future, and it did. Not all periods in our history provided that… he hit the correct one.
    Now that the economy is stumbling, BRK has, too. If it returns, people will say: genius. If not, they’ll say: I remember that guy.

  40. amannamedbob says:

    @Andy Tabbo: Not to belabor it, but your point about Buffett is still somewhat nonsensical. Was he wiped out in the bear market of the 70s? Was he not widely criticized during the late stages of the bull market in 90s? He has a following, certainly, but to claim he’s an icon of the ‘last bull market’ is going a bit too far. He’s been investing successfully for over 50 years, through all kinds of markets.

  41. Whammer says:

    @mrdknight — I think I follow you — you’re saying that the current market value, if you were to account for it more appropriately as it relates to history, is pretty high with respect to GDP. Is that what you’re saying, or do you mean exactly the opposite?

  42. Blissex says:

    That graph contains a big mistake: the mean is way lower than 70%, because that 70% line is skewed by the extraordinary values in the 1995-2010 period, values greatly distorted by the enormous rise in stocks purchased on margin thanks to the yen and dollar carry trades.

    The long term mean is around 50-60% as that’s the reasonable level considering the rate of growth of GNP and stocks returns…

  43. AGG says:

    I saw Buffett on TV the other day. He looks like a truck ran over him. I don’t think things are working out too well for him. He knows this is 1966 on steroids. He just doesn’t want to come out and say it.
    Follow him and you are just another lemming going off the cliff.

  44. Andy Tabbo says:


    You’re point is well taken and acknowledged. I agree he’s obviously been a hugely successful manager and investor through many different markets and there’s a reason he’s the richest man in the world.

    I would say though that he has been treated like a media darling for many, many years. Everyone in the world cites Buffetisms. His annual meetings draw huge crazy crowds to hear the “words of the Oracle.” I think it’s safe to say he is seen as THE big hero of the “investing class.”

    And, hey, it’ll probably all work out OK for him someday…if you have deep enough pockets I guess you can ride out anything….but he has definitely been a little “early.”

  45. Steve Barry says:

    Buffet has always said that he likes to buy at a discount…that means about 50% on that chart…also, since we are now much more socialist than ever before, I’d cut the buy point to 40%

  46. bobc7i says:

    So the rising trendline from the lows of the 1940s to the lows of the early 1980s points to a Buffet buy-point around 70% of GNP. Is the rising trendline perhaps taking globalization into account?

  47. mudpuppy says:

    It’s obvious that most of the people here have no idea how Buffett invests.
    First, any company he invests in he has studied for years. He know it inside and out. He followed silver for 20 years before he bought it. When he bought coke he followed it for 25 years. He can tell you the cost of each ingrediant in a can of coke as well as the cost of ingrediant in every one of cokes competitors. When he bought petrochina he knew the cost of their reserves ($6.00/barrel) and the cot of reserves of each of their competitors reserves. He made 600% on that investment. But it didn’t happen in a week. It happened in 5 years.
    Second, he invests. He doesn’t trade. His time frame isn’t tomorrow, or next week or even next year. It’s 5 or 10 years from now. When he began buying The wasington Post in 1973 he figured its value at $400 million. It was selling for$80million. He bought all he could get his hands on. It took 10 years before he broke even.
    Like him or hate him, he is not your everyday investor. He is a financial genius who could care less what others think. His salary from Berkshire is $100,000 a year. Not 1 million, not 10 million, but 100,000.
    He is honest. He has given nearly all his money to charity. He’s lived in the same modest house for 55 year. He doesn’t believe his children should get all his money and be deprived of the value of working for a living. If we all lived like him the world would be a better place.

  48. karen says:

    mudpuppy, i have never heard such cr*p in my entire life. you didn’t know about his california homes? his and hers by the way… and he didn’t sell his at the right time… you obviously don’t know his tactics for acquiring his % ownership in publicly traded companies, either… enuf… keep your blinders on if it helps you.

  49. royrogers says:

    we must be in a deppression, only a few, like BR can escape the
    wealth destruction.

  50. mudpuppy says:

    Karen, yes I know about his Cal homes. What does that have to do with anything?
    And just what are his tactics for acquiring his % ownership in publicly traded companies?
    He takes advantage of the opportunities afforded him, which is his responsibility as CEO of Berkshire.
    I don’t have blinders on because what he does or doesn’t do doesn’t affect me.
    Is he a Saint? No. Are you? He just has happened to have made many individuals millionairs. Have you?

  51. gfeirman says:

    In The NY Times article from 10/17, he was talking about moving his PERSONAL ACCOUNT, which at the time was 100% in treasuries, into stocks. So the buys you mention don’t really apply because they were all Berkshire buys before the Op-Ed. The market isn’t lower now then it was back when Buffett was buying and many stocks are higher so it’s very possible that Buffett is up, even a good amount, in his personal portfolio on his October buys.