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-   -   Buffett Likes Ratio of a Country's Equity Total Market Value to It's GNP (http://www.early-retirement.org/forums/f28/buffett-likes-ratio-of-a-countrys-equity-total-market-value-to-its-gnp-56638.html)

haha 06-21-2011 12:44 PM

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

MasterBlaster 06-21-2011 12:48 PM

Quote:

Originally Posted by haha (Post 1082118)
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

ronin 06-21-2011 12:52 PM

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

MasterBlaster 06-21-2011 12:58 PM

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.

haha 06-21-2011 01:40 PM

Quote:

Originally Posted by MasterBlaster (Post 1082119)
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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