It’s one of my favorite market indicators.
Not because it’s associated with one of the greatest investors of all time — Warren Buffett — but because it just makes sense.
I’m taking about the “Buffett Indicator.”
The Buffet Indicator assigns a value to the financial markets based on two very important data points: total market capitalization and gross domestic product.
Buffett himself has said that this indicator is “probably the best single measure of where valuations stand at any given moment.” With a net worth over $100 billion and an average annual investment return of 20%, it’s safe to assume he knows what he’s talking about…
Today I’m going to share what that indicator is saying about the stock market … why that means the world’s best stock picker isn’t buying stocks right now… and what all this means for your investments.
But first, it’s important to understand what we are talking about…
What Is the Buffet Indicator Exactly?
The Buffett Indicator first looks at the Wilshire Total Market Cap (TMC). The TMC is the total value of all American stocks currently traded in the United States. Right now, that number is just under $50 trillion.
Next, the indicator looks at GDP, which is the total value of goods produced and services provided in a country in one year. The U.S. is on track to hit just over $23 trillion for 2021.
When we look at the ratio of TMC over GDP, we get the Buffett Indicator ratio. Right now, that ratio is sitting at 208%.
This ratio is a simple way to understand the general value of our markets. By assigning a ratio, we can get a general idea of how much the market is willing to pay compared to how much our economy is producing. It’s akin to valuing an employee’s salary based on their performance.
Based on five decades of tracking this ratio, our stock markets are significantly overvalued and are statistically likely to return negative 3.2% per year.
Further, over the past 50 years, the Buffett Indicator has never been this overvalued.
(In July 1982, the Buffett Indicator registered at 32.7%, which was the most overvalued the market has been since 1970.)
To be clear, that does not mean we’ll see a market crash in the next month. We might not even see a crash for several more years… or more.
The reason why this indicator is important is because it’s also a preview of how much upside potential there is in the broader market. If the Buffett Indicator is registering at an all-time high (meaning that the market is overvalued), do we expect to see significantly larger gains in publicly traded stocks soon?
Well… let’s look to the man himself and see what he is doing.
Despite Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) sitting on more than $140 billion in cash, Buffett’s conglomerate is not actively acquiring new positions in any companies. Instead, Berkshire is buying back its own shares, as the company is technically trading below its intrinsic value.
Berkshire Hathaway has a big pile of money to spend, and the cheapest thing it can find that has great value is its own shares.
Buffett supporters trust that the company is doing the right thing and patiently waiting for attractive deals to pop up.
Warren Buffett… one of the greatest investors ever… is NOT buying the market right now.
Now, let’s take a look at what someone even richer than Buffett is doing…
Why Elon Musk Is Dumping His Stock
What about the world’s richest man, Elon Musk? What stock is he buying?
None. He’s not buying any. Instead… he’s selling.
According to financial filings that came out on the evening of Nov. 10, Musk just sold $5 billion worth of Tesla (NASDAQ:TSLA) stock.
And why not? Considering that he is now the world’s richest person, and his electric car company share price has been on an absolute tear, he can afford to give up some of this ownership. (Musk also reportedly has a massive tax bill that he needs to pay.)
You never lose money by selling for a profit. (That’s a good lesson to remember!)
Now, what about that other billionaire guy?
Jeff Bezos, the former “richest man in the world,” has so far sold $9.9 billion worth of Amazon (NASDAQ:AMZN) stock in 2021.
To be fair, Bezos stepped down as CEO of Amazon earlier this year, so he’s now taking money off the table. With a couple hundred billion dollars of net worth, he can afford to spend a couple billion here and there.
There are lessons to be learned here.
After all, if you want to know when and where to invest, it makes sense to watch what the world’s richest people are doing.
Invest Like a Billionaire
Right now, three of the wealthiest people on the planet are cashing in on stock they already own or patiently waiting for a better time to buy.
Interestingly, if we look at another category of wealth holders — family offices — we can see that they are also not focused on the public markets. Instead, they are plowing money into private deals, where they see far more upside.
As recently reported by Bloomberg, “Family offices made up 4.2% of the roughly 23,000 venture capital deals worldwide this year through Aug. 31, more than double their share a decade ago.”
Globally, venture capital deals are up 105% on a year-over-year basis, with the sector reaching nearly $100 billion for 2021, according to CB Insights.
Bottom line: The VC market is heating up, and investors are searching for deals with much more upside potential.
But it doesn’t stop there…
The secondary transactions market has been on fire. That’s where private equity is sold from one party to another prior to an IPO or acquisition. The secondary transactions market is a great way for an early investor to get liquidity, while the buyer (the secondary) gets exposure to a private company that was previously unavailable.
As recently published by the Wall Street Journal, secondary transactions are set to reach $100 billion for the year, which would be their highest value ever. This is mostly fueled by wealthy private investors looking to expose their portfolios to an asset class that provides far greater return potential than the richly valued public market stocks.
I’ve said it before, and I’ll say it again. Next to building and owning your own company… private investing is the best way to build wealth.
The rich people we’ve been talking about agree with me.
History is full of stories of people who made 50X… 100X… even 2,000X through private investing.
But for generations, startup investing was largely off limits to regular investors like you and me. Government laws closed this world off to anyone who wasn’t rich.
All under the guise of “protecting” individual investors.
But the laws simply served to help the rich get richer by giving them exclusive access to some of the world’s greatest investments.
Early private investors in the now giant online retail firm Shopify (NYSE:SHOP) saw 130,000% returns. Early investors in the now giant social media firm Pinterest (NYSE:PINS) made 580,000% gains. Early Twitter (NYSE:TWTR) investors saw 159,000% gains.
Meanwhile, regular investors who didn’t have connections were locked out in the cold.
Private investing can now be a hugely powerful part of just about any investor’s wealth-building plans.
Stay tuned! Here at Venture Capital Digest, we’ll be covering how you can grab your share of this wealth.
Editor, Venture Capital Digest
On the date of publication, Cody Shirk did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
By focusing on megatrends that will shape the future, Cody Shirk uncovers generational wealth in the private investing space. To make sure you never miss Venture Capital Digest, click here to subscribe.