He's been clear for decades that an overall barometer of market health is the ratio of the stock market's total value to GDP. This metric is called "The Buffett Indicator".
It's at a ratio today that dwarfs the dot-com runup.
Given how companies operate internationally, is it fair to compare the stock market valuation against GDP? If Apple moved to a New Zealand based stock exchange, would that mean that the stock market in New Zealand wasn't healthy?
Also, could an increase in internationalization explain the relative difference between the Buffet Indicator today vs 25 years ago during the DotCom boom?
Interesting point -- I wonder if there are variations on this calculation available with global GDP, or ideally, company market cap adjusted by percentage of US revenue/profit to US GDP.
Foreign investment in US stocks is certainly a factor. It’s been on the rise since the 90s and it could be interpreted as making the US markets overheated, if foreign investment suddenly pulled out…
Hm, but doesn't this indicator conflate two very different phenomena?
1. Investor valuations of the total value of all publicly traded companies.
2. The fraction of the total valuation of all firms that in publicly traded.
Imagine a world where all businesses are totally static, report steady earnings, etc. One day, dozens of formerly privately held firms IPO. This indicator increases, but this doesn't not reflect any change in the valuation of the legacy firms: merely that more of the value of all enterprises is being publicly traded.
You certainly make a good point, but in defense of the Buffet Indicator, perhaps the tendency for private companies to go public and vice versa also depends on economic conditions. Being a public company can be a costly and burdensome proposition, so unless there's a clear increase in ROI in terms of access to capital and shareholder liquidity, there's no real incentive for a profitable private firm to go public. So if a lot of private companies are going public, then that could also be an indicator that the public markets are overheated and something is fundamentally out of balance.
One counterpoint is that this assumes the economic growth rate is and will continue to be constant over the long term.
Of course, if you think that AI and tech more broadly is going to increase our rate of economic growth over the next few decades, you would expect the "correct" value of that ratio to increase significantly.
And that's, of course, ignoring the other factors like interest rates, inflation, etc. that need to be taken into account as well.
If Buffet is fearful, the people being greedy are so beyond your means and chasing an irrational self-destructiveness that you have zero chance of seeing an upside by being aligned with them.
Another sign that a crash is looming. The reshaping of the federal government, trade agreements, and geopolitical landscape MUST result in some major adjustment in equities, after which cash will be of great value.
So many people have been saying this since ~2016, and nothing seems to shake the economy for long. Every chance at a correction gets manhandled back to the "line go up" status quo by unprecedented action by regulators and watchdogs, all in the name of "stability". We can't even call 2 quarters of GDP shrinkage a recession anymore (something about a strong job market).
That last bit isn't just a random gripe, but key: something about the state of the financial system makes even serious talk of a downturn verboten. The mandate to prevent bank runs has now been extended to a general effort to dissuade people from pulling their money out of anything it might be in. My completely uneducated layman's suspicion is that this is because so much of the economy's financial infrastructure relies on the aforementioned stability. Valuations can't go down because they're collateral for loans which guarantee cash flow to businesses that everyone's retirement is invested in, the health of which is the only reason consumer sentiment stays high enough to justify workforce investment which, of course, pays the bills, etc.
What I'm trying to say is that there will be no crash, in the sense that the current system stays viable. If things ever rain, they will pour, and you're looking at a foundational collapse where basic assumptions about the structure of our economy no longer apply (e.g., property ownership and debt rights).
That was the closest we got, and you did start to see the symptoms I mentioned. Banks foreclosed illegally on some houses, people walked away from underwater mortgages, and the share of housing owned by individuals to reside in versus owned by private equity to rent out shifted.
But I think it's difficult to have that happen again. A lot of the action mentioned before must have been taken with an eye towards never getting that close. Unprecedented things like calling on the FDIC's entire reserve to backstop a handful of banks (as an emergency measure,
and then sorting it out later), regardless of the size of the accounts that otherwise would have been bailed in. Or the many, many Fed programs to provide emergency liquidity. Simply not taking the initiative in these cases would have represented the perfect chance to start a controlled demolition and clean-out of troubled positions. But that's assuming the demolition can be controlled, and that there are any positions that aren't troubled. Could be that every valuation is out of wack, that you can't correct without upending everything. It's possible that we are in a completely fraudulent system.
You might get lucky and switch to cash from equities at just the right period of time to come out ahead, but you're better off just leaving your cash invested in equities and buying lotto tickets if you feel like gambling.
One thing most people do not realize is that Buffett is probably creating a contingency in an event he is no longer around. After Munger’s death and Buffett no longer around, I’d assume a lot of investors would want to pull out at least some of their money. Buffett is probably looking out for BH.
There's been some speculation about recent BH moves into small positions that Munger/Buffet don't traditionally meddle in. So it's kind of assumed that younger guys are taking more of the helm. The problem is their choices haven't been stellar.
It's worth noting that Munger's kids are more well off in terms of personal development and career growth compared to Buffet. All of Buffet's kids are basically philanthropists. Why bring this up? Because it brings up some doubts about successorship
I never said it was a mutual fund. But investors may still pull out money by selling stock. One area where typically this would come into play would be M&A (mostly A for BH). Unless you’re doing an all cash offer, there is an equity component to acquisitions. Lower BRK price would require you to offer up more equity, which is where cash is helpful. Your major investors are protected and you don’t lose out on opportunities.
Another place where normal corporations would be affected by stock price is when they want more liquidity for operations via debt. This doesn’t apply to BRK because they already have a massive stockpile of cash. But stock price is not that isolated from company operations if a lot of investors start pulling out money (by selling stock).
The reason people are worried about this, is because he has been doing this right before crashes and recessions.
Now, he doesn’t have a magic device that tells the future. But it’s also not hard to tell that we’re in a economically uncertain and overextended time.
The uncharacteristic lack of transparency around Buffett’s recent decision making points toward two things: an extremely overvalued market paired with a completely incompetent American political administration - one that has a high degree of probability of crashing the global economy.
But he doesn’t want to say the latter half to avoid the wrath of an administration that has immediately proven to be erratic, vindictive, untrustworthy and cruel.
He started doing this well before it was clear that Trump would win reelection. He doesn't want to say the latter half because it will become a self-fulfilling prophecy, regardless of who's in office. They don't call him the Oracle of Omaha for nothing.
Trying to time the market is a bad idea, I keep repeating to myself. But the idea of having more cash on hand to weather uncertain times, including moving back to Europe if that looks like a good move, seems appealing right now.
That phrase is really dependent on where you are in life. If you're young, sure! But if you have a big purchase coming up in the next few years (house) or might be retiring, I can't imagine tying up a lot of one's resources in the market right now. The downside really can outweigh the upside.
That advice has been good in stable times. The last 75 years have been remarkably stable for the world. The last 150 have been remarkably stable for North America.
At the moment, it's an open question how stable things will be going forward.
Buffett as a value investing guy has always lent towards putting more into stocks when they are cheap and more into cash when they are expensive as they now are. That is different from predicting a crash which is not something he tends to do. At least I think he'd say financial crashes will happen from time to time but it's hard to predict the timing.
My wonder isn’t why he is doing this, it’s more why everyone else is t doing the same? Are we all that sure we know what happens to the stock market when the government collapses?
But if you're losing sleep about things going up 'too much' or the regular ups and downs of stock markets, then not being 100% equities is generally fine if it helps you keep the course and not cash out. Having 10 or 20 or 40% of your portfolio in bonds (and rebalancing) is reasonable:
> Instead Buffett said that this posture in no way represented a move away from his love for stocks.
“Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities,” Buffett wrote in the 2024 annual letter released Saturday. “That preference won’t change.”
Those are weasel words. He doesn't address why his position is changing. He misdirects away from it by saying he loves stocks. Which has no bearing on weather or not you should be increasing or decreasing your position in stocks.
He doesn't address it. You're right. But oftentimes in business, especially when it comes to public statements pertaining to shareholders, you cannot be honest.
As an example, suppose, BH is selling stocks and amassing more cash than usual in an attempt to shift investment into a new undervalued firm or commodity. Now, they need to research, investigate, double check, build a strategy, build a contingency plan, etc. etc. They cannot reveal this plan publicly before it is complete as that would drive up the price of any potential targets.
In financial news, "cash" is used as a stand-in for treasuries. When an entity is referred to as having a large cash position, it is typically referring to a position in relatively low risk US debt. Warren Buffett reportedly said this at the shareholder conference about Berkshire's position in treasury bills:
"We were aided by a predictable large gain in investment income as Treasury Bill yields improved and we substantially increased our holdings of these highly-liquid short-term securities"
Much of the world would like to replace the US Dollar with something else as the global reserve currency. Problem is, all the alternatives are worse. Until that changes, the Dollar will retain its position.
So, Warren Buffett’s been dumping stocks like Apple and Bank of America—$134 billion worth—and sitting on a massive $334 billion cash stash. Dude’s not spilling the beans in his annual letter, but it’s kinda wild, right? When the guy who’s all about buying great companies cheap can’t find anything worth grabbing, even with the market going nuts, it makes you wonder: are things getting too pricey? He’s still all in on equities long-term, but what’s he waiting for—some big crash or just a killer deal down the road?
Don't want it to sound harsh but he's 94 years old. Could it be he just doesn't want to go out with a loss and is fine with his final score not fluctuating too much? Even if the markets don't correct/crash like his reserves seems to indicate, nobody can blame him for eventually being too early or not losing money opposed to gaining even more.
Because this strategy seems to be in line with what we've been reading ("buffet amassing cash") for the last 5 years at least?
To me he’s doing the same thing he’s always done. I don’t think this is anything special. The market to gdp ratio is super high. It makes sense to be cautious here if you are managing hundreds of billions of dollars.
He's been clear for decades that an overall barometer of market health is the ratio of the stock market's total value to GDP. This metric is called "The Buffett Indicator".
It's at a ratio today that dwarfs the dot-com runup.
https://www.longtermtrends.net/market-cap-to-gdp-the-buffett...
Given how companies operate internationally, is it fair to compare the stock market valuation against GDP? If Apple moved to a New Zealand based stock exchange, would that mean that the stock market in New Zealand wasn't healthy?
Also, could an increase in internationalization explain the relative difference between the Buffet Indicator today vs 25 years ago during the DotCom boom?
Interesting point -- I wonder if there are variations on this calculation available with global GDP, or ideally, company market cap adjusted by percentage of US revenue/profit to US GDP.
Foreign investment in US stocks is certainly a factor. It’s been on the rise since the 90s and it could be interpreted as making the US markets overheated, if foreign investment suddenly pulled out…
Hm, but doesn't this indicator conflate two very different phenomena?
1. Investor valuations of the total value of all publicly traded companies. 2. The fraction of the total valuation of all firms that in publicly traded.
Imagine a world where all businesses are totally static, report steady earnings, etc. One day, dozens of formerly privately held firms IPO. This indicator increases, but this doesn't not reflect any change in the valuation of the legacy firms: merely that more of the value of all enterprises is being publicly traded.
You certainly make a good point, but in defense of the Buffet Indicator, perhaps the tendency for private companies to go public and vice versa also depends on economic conditions. Being a public company can be a costly and burdensome proposition, so unless there's a clear increase in ROI in terms of access to capital and shareholder liquidity, there's no real incentive for a profitable private firm to go public. So if a lot of private companies are going public, then that could also be an indicator that the public markets are overheated and something is fundamentally out of balance.
One counterpoint is that this assumes the economic growth rate is and will continue to be constant over the long term.
Of course, if you think that AI and tech more broadly is going to increase our rate of economic growth over the next few decades, you would expect the "correct" value of that ratio to increase significantly.
And that's, of course, ignoring the other factors like interest rates, inflation, etc. that need to be taken into account as well.
Shouldn't those things increase GDP as well?
No, that's the whole point.
They don't increase current GDP.
Valuation of stocks is based on future expected profitability, while GDP is today's GDP.
But you don’t invest in tech. You invest in companies. See: dotcom bubble, where most companies were bad bets. Even very established ones.
If you think the crash will happen, then it might be cheaper to buy after the crash.
I'm explaining the perspective if you think a crash won't happen.
Of course it's always cheaper to buy after a crash if there is one.
I think he said that no longer holds cause so many us public companies operate in foreign markets.
Asset inflation is also a global phenomenon.
Most of the market cap is in the technology giants with global reach.
Be fearful when others are greedy and greedy when others are fearful. -Warren Buffett [1]
But if he’s the one who is fearful, which one should I be?
[1] https://www.investopedia.com/articles/investing/012116/warre...
That’s not how I interpret this quote.
It’s about looking at the economy, the companies, the prices. Overvalued stock is people being greedy etc.
It’s not about looking at what a specific person does.
Quite the contrary. If some professional with a track record you trust makes a call, it’s something you listen to if you’re an amateur.
If Buffet is fearful, the people being greedy are so beyond your means and chasing an irrational self-destructiveness that you have zero chance of seeing an upside by being aligned with them.
Unless you know more than he does, probably fearful.
> But if he’s the one who is fearful, which one should I be?
As the quote alludes to, depends on what "others" are: greedy or fearful.
Yes but is the advice based on the state of others from the perspective of Buffett, or based on others from the perspective of me?
Another sign that a crash is looming. The reshaping of the federal government, trade agreements, and geopolitical landscape MUST result in some major adjustment in equities, after which cash will be of great value.
So many people have been saying this since ~2016, and nothing seems to shake the economy for long. Every chance at a correction gets manhandled back to the "line go up" status quo by unprecedented action by regulators and watchdogs, all in the name of "stability". We can't even call 2 quarters of GDP shrinkage a recession anymore (something about a strong job market).
That last bit isn't just a random gripe, but key: something about the state of the financial system makes even serious talk of a downturn verboten. The mandate to prevent bank runs has now been extended to a general effort to dissuade people from pulling their money out of anything it might be in. My completely uneducated layman's suspicion is that this is because so much of the economy's financial infrastructure relies on the aforementioned stability. Valuations can't go down because they're collateral for loans which guarantee cash flow to businesses that everyone's retirement is invested in, the health of which is the only reason consumer sentiment stays high enough to justify workforce investment which, of course, pays the bills, etc.
What I'm trying to say is that there will be no crash, in the sense that the current system stays viable. If things ever rain, they will pour, and you're looking at a foundational collapse where basic assumptions about the structure of our economy no longer apply (e.g., property ownership and debt rights).
There was quite a good crash 2006-2008 when property prices fell, but no foundational collapse. That kind of thing could happen again.
That was the closest we got, and you did start to see the symptoms I mentioned. Banks foreclosed illegally on some houses, people walked away from underwater mortgages, and the share of housing owned by individuals to reside in versus owned by private equity to rent out shifted.
But I think it's difficult to have that happen again. A lot of the action mentioned before must have been taken with an eye towards never getting that close. Unprecedented things like calling on the FDIC's entire reserve to backstop a handful of banks (as an emergency measure, and then sorting it out later), regardless of the size of the accounts that otherwise would have been bailed in. Or the many, many Fed programs to provide emergency liquidity. Simply not taking the initiative in these cases would have represented the perfect chance to start a controlled demolition and clean-out of troubled positions. But that's assuming the demolition can be controlled, and that there are any positions that aren't troubled. Could be that every valuation is out of wack, that you can't correct without upending everything. It's possible that we are in a completely fraudulent system.
Here is your buying power if you keep your money in cash: https://tinyurl.com/y6vthhxu
And here is what happens to your money in equities: https://www.officialdata.org/us/stocks/s-p-500/1900#inflatio...
You might get lucky and switch to cash from equities at just the right period of time to come out ahead, but you're better off just leaving your cash invested in equities and buying lotto tickets if you feel like gambling.
When people say “cash” in terms of investing, they sometimes mean bonds, gold etc.
Markets can stay irrational waaayy longer that you can imagine or stay solvent
Isn’t the crash already happening? Just look at Tesla.
One thing most people do not realize is that Buffett is probably creating a contingency in an event he is no longer around. After Munger’s death and Buffett no longer around, I’d assume a lot of investors would want to pull out at least some of their money. Buffett is probably looking out for BH.
There's been some speculation about recent BH moves into small positions that Munger/Buffet don't traditionally meddle in. So it's kind of assumed that younger guys are taking more of the helm. The problem is their choices haven't been stellar.
It's worth noting that Munger's kids are more well off in terms of personal development and career growth compared to Buffet. All of Buffet's kids are basically philanthropists. Why bring this up? Because it brings up some doubts about successorship
If you sell BRK shares, the money comes from the buyer, not BRK itself. It's a corporation, not a mutual fund.
To play devils advocate: if the stock dramatically declines then the next people at the helm could buy back tons of the stock the more cash they have.
And to play devils advocate to that: Berkshire probably almost generates cash as fast as they would ever buy back stock.
They do buybacks pretty regularly, but obviously that’s true in aggregate.
I never said it was a mutual fund. But investors may still pull out money by selling stock. One area where typically this would come into play would be M&A (mostly A for BH). Unless you’re doing an all cash offer, there is an equity component to acquisitions. Lower BRK price would require you to offer up more equity, which is where cash is helpful. Your major investors are protected and you don’t lose out on opportunities.
Another place where normal corporations would be affected by stock price is when they want more liquidity for operations via debt. This doesn’t apply to BRK because they already have a massive stockpile of cash. But stock price is not that isolated from company operations if a lot of investors start pulling out money (by selling stock).
The reason people are worried about this, is because he has been doing this right before crashes and recessions.
Now, he doesn’t have a magic device that tells the future. But it’s also not hard to tell that we’re in a economically uncertain and overextended time.
>doing this right before crashes
He's been raising cash holdings for years.
Yeah, it's funny to me that the article begins with this sentence:
"The mystery over Warren Buffett’s surprisingly defensive stance deepened over the weekend."
This isn't exactly a mystery worthy of Sherlock Holmes. We can all read the newspapers.
The uncharacteristic lack of transparency around Buffett’s recent decision making points toward two things: an extremely overvalued market paired with a completely incompetent American political administration - one that has a high degree of probability of crashing the global economy.
But he doesn’t want to say the latter half to avoid the wrath of an administration that has immediately proven to be erratic, vindictive, untrustworthy and cruel.
He started doing this well before it was clear that Trump would win reelection. He doesn't want to say the latter half because it will become a self-fulfilling prophecy, regardless of who's in office. They don't call him the Oracle of Omaha for nothing.
Ben Felix recounts Buffett's answer to this in 2019:
https://youtu.be/32SnTUtdsOI?t=557
It’s almost like a global trade war would be bad for businesses.
Trying to time the market is a bad idea, I keep repeating to myself. But the idea of having more cash on hand to weather uncertain times, including moving back to Europe if that looks like a good move, seems appealing right now.
That phrase is really dependent on where you are in life. If you're young, sure! But if you have a big purchase coming up in the next few years (house) or might be retiring, I can't imagine tying up a lot of one's resources in the market right now. The downside really can outweigh the upside.
That advice has been good in stable times. The last 75 years have been remarkably stable for the world. The last 150 have been remarkably stable for North America.
At the moment, it's an open question how stable things will be going forward.
Buffett as a value investing guy has always lent towards putting more into stocks when they are cheap and more into cash when they are expensive as they now are. That is different from predicting a crash which is not something he tends to do. At least I think he'd say financial crashes will happen from time to time but it's hard to predict the timing.
My rationale for upvoting this is that the more visibility a self fulfilling prophecy gets, the less likely it is to actually materialize
Wouldn’t it be the exact opposite, that the more people see it, the more likely it is to happen
My wonder isn’t why he is doing this, it’s more why everyone else is t doing the same? Are we all that sure we know what happens to the stock market when the government collapses?
Buffett sitting is cash is not a problem because getting more returns isn't going to make a material difference to him (or Berkshire).
The general public sitting in cash waiting for the dip is a problem because you are potentially missing out on a lot of returns:
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
And even if you bought at the top, if you just 'hang on', you'll probably do well:
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
But if you're losing sleep about things going up 'too much' or the regular ups and downs of stock markets, then not being 100% equities is generally fine if it helps you keep the course and not cash out. Having 10 or 20 or 40% of your portfolio in bonds (and rebalancing) is reasonable:
* https://investor.vanguard.com/investor-resources-education/e...
In fact, in the 2000s being in bonds and rebalancing would have saved your bacon for returns in the US:
* https://www.forbes.com/sites/investor/2010/12/17/the-lost-de...
Doing this is easy with an 'all-in-one' or target date fund:
* https://www.fidelity.ca/en/investments/solutions-portfolios/...
* https://investor.vanguard.com/investment-products/mutual-fun...
> Instead Buffett said that this posture in no way represented a move away from his love for stocks.
“Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities,” Buffett wrote in the 2024 annual letter released Saturday. “That preference won’t change.”
Those are weasel words. He doesn't address why his position is changing. He misdirects away from it by saying he loves stocks. Which has no bearing on weather or not you should be increasing or decreasing your position in stocks.
Buffett is always bullish in words over the companies he holds, fully or partially.
Then proceeds doing otherwise anyway.
If he’s selling stocks he thinks the market is overvalued. Which it is. He’s not keeping any secrets here. It’s been this way for decades.
Buffett is not intending to advise you as to whether you should increase or decrease your stock holdings.
He doesn't address it. You're right. But oftentimes in business, especially when it comes to public statements pertaining to shareholders, you cannot be honest.
As an example, suppose, BH is selling stocks and amassing more cash than usual in an attempt to shift investment into a new undervalued firm or commodity. Now, they need to research, investigate, double check, build a strategy, build a contingency plan, etc. etc. They cannot reveal this plan publicly before it is complete as that would drive up the price of any potential targets.
Just an example.
When they say "cash", do they mean a specific currency? Because I'm not too confident in the US dollar going forward.
In financial news, "cash" is used as a stand-in for treasuries. When an entity is referred to as having a large cash position, it is typically referring to a position in relatively low risk US debt. Warren Buffett reportedly said this at the shareholder conference about Berkshire's position in treasury bills:
"We were aided by a predictable large gain in investment income as Treasury Bill yields improved and we substantially increased our holdings of these highly-liquid short-term securities"
https://www.ft.com/content/114a157a-6dd8-4705-9efa-53fbe7688...
This implicitly means that you are also not confident about the US economy as well. What do you think will change?
Much of the world would like to replace the US Dollar with something else as the global reserve currency. Problem is, all the alternatives are worse. Until that changes, the Dollar will retain its position.
Berkshire Hathaway – 2024 annual letter [pdf] https://www.berkshirehathaway.com/letters/2024ltr.pdf (https://news.ycombinator.com/item?id=43138846)
So, Warren Buffett’s been dumping stocks like Apple and Bank of America—$134 billion worth—and sitting on a massive $334 billion cash stash. Dude’s not spilling the beans in his annual letter, but it’s kinda wild, right? When the guy who’s all about buying great companies cheap can’t find anything worth grabbing, even with the market going nuts, it makes you wonder: are things getting too pricey? He’s still all in on equities long-term, but what’s he waiting for—some big crash or just a killer deal down the road?
Don't want it to sound harsh but he's 94 years old. Could it be he just doesn't want to go out with a loss and is fine with his final score not fluctuating too much? Even if the markets don't correct/crash like his reserves seems to indicate, nobody can blame him for eventually being too early or not losing money opposed to gaining even more.
Because this strategy seems to be in line with what we've been reading ("buffet amassing cash") for the last 5 years at least?
To me he’s doing the same thing he’s always done. I don’t think this is anything special. The market to gdp ratio is super high. It makes sense to be cautious here if you are managing hundreds of billions of dollars.
not a man to bet against