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Buffett’s Favorite Metric Says Serious Pain Is Imminent – Here’s What Investors Need To Know

Buffett’s Favorite Metric Says Serious Pain Is Imminent – Here’s What Investors Need To Know

Investors beware. The Oracle of Omaha is holding $129.6 billion in cash and the “Buffett indicator” is flashing warning lights.

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Investing legend Warren Buffett is sounding the alarm for a bull market that continues to push ever higher.

The Berkshire Hathaway (NYSE: BRK.A, BRK.B) Chairman is finding it difficult to put the conglomerate’s funds to work and is currently sitting on nearly $130 billion in cash.

“Yet another increase in the total cash pile at his Berkshire Hathaway, to $129.6 billion, despite $12 billion in net new investments in traded securities in the second quarter (mainly Apple, NASDAQ: AAPL), suggests that master investor Warren Buffett is still having difficulty in finding value in US—and perhaps global—stocks,” said Russ Mould, investment director at AJ Bell.

Source: AJ Bell.



It’s an ominous sign for investors as it indicates that Buffett believes the market is overvalued and overly expensive.

“This is something that investors should consider, as key indexes such as the S&P 500 and FTSE 100 make heavy weather of getting back to, and breaking away from, the all-time highs they set earlier in the year,” Mould continued.

The “ultimate contrarians,” Buffett and his partner Charlie Munger have sat on the sidelines this year despite the M&A fever that has taken the broader market. Buffett warned in his annual shareholder letter in February that there just aren’t enough good companies available to buy at reasonable prices right now.

There’s no doubt the market is getting increasingly expensive. Another ominous warning sign for the market that should be on investors’ radar is the “Buffett indicator,” or what Buffett has called “the best single measure of where valuations stand at any given moment.”

And if historical patterns hold true, complacent investors could be in for some serious pain just ahead.

To put it simply, the “Buffett indicator” is the total market cap of all U.S. stocks relative to the country’s GDP. When the ratio is under 100%, stocks are undervalued and investors should be buying. But when the ratio moves above 100%, it’s time to get defensive.



Right now, the market is nearing 140%.

That’s according to Adem Tumerkan of Palisade Research. Tumerkan noted that the indicator is flashing red as stocks are “extremely overvalued” and investors should get ready for “huge downside ahead.”

How’s that for perspective?

The indicator saw elevated levels before both the dotcom bubble burst and the financial crisis. And is higher now more than ever.

This doesn’t mean stocks will crash tomorrow, but investors should certainly be cautious.

“What we do know is that historically—when the Buffett Indicator gets this high—it means we’re in some-kind-of-bubble and there’s huge downside ahead. And when the downside does come – it’s sudden and swift,” Tumerkan wrote.



Tumerkan isn’t the only one sounding the alarm of a market that’s looking toppy.

Last week when Apple (NASDAQ: AAPL) made its historic rally to reach the $1 trillion valuation mark, the chief economist at Gluskin Sheff, David Rosenberg, tweeted this warning:

As stocks keep climbing and headlines keep celebrating the longest bull market on record, smart investors should think like Buffett and start preparing for what could be an incredibly ugly crash.


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