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Buffett Likes Ratio of a Country's Equity Total Market Value to It's GNP
Old 06-21-2011, 12:44 PM   #1
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Buffett Likes Ratio of a Country's Equity Total Market Value to It's GNP

In a fortune article he said this ratio gives zones of undervalue and zones of overvalue. A Quick Update On Warren Buffett's Favorite Market Valuation Metric

But what index or information can be used to give the numerator, total market value of equities, for the USA?

It sounds like a useful if blunt measurement, but I like measurements that I can maintain rather than ones where I just occasionally run across an article.

What would make a good extimator for this value? Does anyone know what Buffet uses himself?

Thanks,

Ha
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Old 06-21-2011, 12:48 PM   #2
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Quote:
Originally Posted by haha View Post
In a fortune article he said this ratio gives zones of undervalue and zones of overvalue. A Quick Update On Warren Buffett's Favorite Market Valuation Metric

But what index or information can be used to give the numerator, total market value of equities, for the USA?

It sounds like a useful if blunt measurement, but I like measurements that I can maintain rather than ones where I just occasionally run across an article.

What would make a good extimator for this value? Does anyone know what Buffet uses himself?

Thanks,

Ha
For the US...
Wilshire 5000 Total Market Index:

Wilshire Associates
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Old 06-21-2011, 12:52 PM   #3
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I know this isn't what you're looking for, but it is interesting and up-to-date, apparently.

percent-of-world-market-cap-by-country

And the U.S. Census has this chart, thru 2009:

market cap by country
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Old 06-21-2011, 12:58 PM   #4
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Like many metrics, the one described isn't perfect.

The market cap of worldwide companies is expressed in the numerator, yet the US GDP number only reflects domestic economic activity.

Also how does the total market cap index account for ADR issues of foreign companies ?

Also, for some foreign countries, China is a good example, the government controls much of the equity in their large firms. Does then the market cap give a meaningful statistic for that country ?

The linked historical chart seems to indicate a market overvaluation. I would beleive that more if the chart were normalized for prevaling interest rates or inflation.
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Old 06-21-2011, 01:40 PM   #5
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Quote:
Originally Posted by MasterBlaster View Post
For the US...
Wilshire 5000 Total Market Index:

Wilshire Associates
Thanks. This gives a reading that corresponds to the chart in the article.

Clearly there are many problems- for example right before the 73-74 crash this indicator was saying normal valuation, and obviously the current average has been pulled way up by the high markets of recent years. Maybe this is a distortion that will be corrected, maybe not.

But Buffet's comment in giving the rationale does make sense- he says clearly the line can't just keep climbing up and off the chart. IOW, if quoted market cap reflects 100% or more of total US GNP, it's in the nature of capitalism that this tree will not grow to the sky. Although the late 90s showed us that it can get pretty close.

Ha
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