Thursday, February 5, 2009

Buffett Says It's Time to Buy

Famed investor Warren Buffett shares one of his market assessment methods in this Fortune article. By comparing total market value to US Gross National Product, he gives a rough estimate of the relative value of stocks.

Fortune first ran a version of this chart in late 2001. 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."

As can be seen from the chart, however, the current levels are not necessarily cheap by historical standards. In fact, prior to 1995, current levels would be peaks, not valleys. I am not a legendary investor, however, and I imagine there are fundamental reasons for the huge spikes since 1995 on which Buffett could elaborate. Perhaps these reasons have changed the rules and created a new floor. Monetary policy comes to mind, along with an increase in individual investors. I suppose only time will tell if the market is poised for a turnaround or if it will continue to create more bargains.

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