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The Buffett Indicator

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Re: The Buffett Indicator

#81

Post by mellavora »

dcolkitt wrote: post #25
aazaa wrote: post #8

The problem with these indicators is that, although they may indicate over- or undervaluation, they tell you nothing about when a mean reversion will happen. As Keynes famously said: "The market can stay irrational longer than you can stay solvent." An indicator that does a pretty good job of signaling the "when" of a recession, and by extension the likely "when" of large market corrections, is yield curve inversion.…

Another way to think about this is that historically equity returns are so consistently high that even with an accurate predictor of returns it’s not worth not being exposed to stocks. Even if you know the next ten years will be in the bottom decile of returns for the S&P 500, you’re still better off than with cash.

Math suggests otherwise. Quoting Hussman [1]

"Suppose I offer you a security that will pay $100 two days from today. You can buy as much of it as you like today at $50, or you can wait until tomorrow. Tomorrow, I’ll flip a coin. If it’s heads, I’ll sell you the security at $99. If it’s tails, I’ll sell you the security at $25. What should you do?

Clearly, if you buy the security today, you’ll double your money two days from now. That’s a 100% expected return for each dollar you invest, over that 2-day period. If you wait, you’ll earn nothing on the first day, but you’ll then have two possibilities. If heads, you’ll get just 1% on your invested money. If tails, you’ll get a 300% return, quadrupling your money. With a 50/50 chance at each, your expected return for every dollar you invest is 0.51% + 0.5300% = 150.5%. So waiting adds 50.5% to your expected return over that 2-day period."

https://www.hussmanfunds.com/comment/mc201201/

Re: The Buffett Indicator

#82

Post by bildung »

jbay808 wrote: post #60
ethbr0 wrote: post #5

The problem with macro-economic composites is that at that level, everything is unfolding on different timescales. So around transitional moments, your end result is going to go wonky. GDP plummets -> interest rates are dropped -> GDP recovers -> interest rates are raised You're balancing between responsiveness, accuracy, and reliability: pick two. I'd have thought the last few crises would have taught us that we sho…

I'm increasingly of the opinion that control theory is the right framework to apply here. The very existence of business cycles suggests that the economy has "underdamped poles", and perhaps a more forward-looking central bank policy could add enough phase margin to damp them and prevent recessions altogether. But it would require always taking one's foot off the gas pedal before conditions really seem good enough.

You may like Keynes :) Some of his main points were about countercyclical fiscal policy.

Re: The Buffett Indicator

#83

Post by JumpCrisscross »

This indicator is sensitive to a number of financial factors, including corporate capital structure (higher if companies finance with equity over debt) and IPO rates (higher if companies go public faster than public companies fail or go private). Given both those have been highly variable in recent years, I’d argue this measure has receded in value as a metric.

Re: The Buffett Indicator

#84

Post by mellavora »

bruce343434 wrote: post #71
ItsMonkk wrote: post #33

Earlier quoted context omitted.

Fed Fund Rate vs 30YT since 1970(only cherry picking this year because the data on fred is poor before this period, and end of gold standard is significant) is a perfect 8/8[0]. [0]: https://fred.stlouisfed.org/graph/?g=ENDs

Which curve am I looking at and for what? The blue line dips a lot of times, but only sometimes does a dip coincide with a recession.

Not the OP, but I'd guess they meant "blue line greater than red line" .

Re: The Buffett Indicator

#85

Post by nlitened »

pfortuny wrote: post #65

As long as interest rates are essentially Breaking the concept of money as value in time (and that is what the ineterest rate means, because value now is better than value later) has broken all the basics of economics and finance. And is totally distorting. It is a huge shame which central bankers somehow will have to pay for. Edit: just to explain. "Value now" is better than "value later" or otherwise actions are ge…

> It is a huge shame which central bankers somehow will have to pay for.

You surely mean that central bankers will have to pay nothing, and poor people will pay.

Re: The Buffett Indicator

#87

Post by mewpmewp2 »

JackPoach wrote: post #58
aazaa wrote: post #8

The problem with these indicators is that, although they may indicate over- or undervaluation, they tell you nothing about when a mean reversion will happen. As Keynes famously said: "The market can stay irrational longer than you can stay solvent." An indicator that does a pretty good job of signaling the "when" of a recession, and by extension the likely "when" of large market corrections, is yield curve inversion.…

It's not an indicator problem, it's a problem of people trying to time markets. Also, there are two ways to use the Buffet Indicator - right and wrong. The wrong way is to say 'it's overvalued, I should do something - short the market'. The right way is 'it's overvalues, I should avoid doing something - buying overvalued stocks'. Buffett has been sitting on piles of cash in the past for years and years, avoiding buyi…

> He never tried timing the market, simply waiting for the right moment.

That's the same thing. Whether you are staying out or buying in, both are trying to time markets. Avoiding doing something is also an action.

In fact historically by staying out because you think something is overvalued has been shown to be outperformed by constantly putting in to the market whatever you can.

Re: The Buffett Indicator

#88

Post by belter »

nlitened wrote: post #85
pfortuny wrote: post #65

As long as interest rates are essentially Breaking the concept of money as value in time (and that is what the ineterest rate means, because value now is better than value later) has broken all the basics of economics and finance. And is totally distorting. It is a huge shame which central bankers somehow will have to pay for. Edit: just to explain. "Value now" is better than "value later" or otherwise actions are ge…

> It is a huge shame which central bankers somehow will have to pay for. You surely mean that central bankers will have to pay nothing, and poor people will pay.

Central Bankers will argue they did not know how the Economy works. They were able to pull off that one before:

"Greenspan - I was wrong about the economy. Sort of"

https://www.theguardian.com/business/2008/oct/24/economics-c...

"‘I made a mistake,’ admits Greenspan"

https://www.ft.com/content/aee9e3a2-a11f-11dd-82fd-000077b07...

"Greenspan: I was wrong about the economy"

https://youtu.be/XQFq97ljy3k

"Greenspan Says I Still Dont Fully Understand What Happened"

https://youtu.be/R5lZPWNFizQ

"Alan Greenspan, ''Savant Idiot''"

https://www.forbes.com/2008/10/24/alan-greenspan-idiot-oped-...

Re: The Buffett Indicator

#89

Post by mewpmewp2 »

paulmd wrote: post #68
JackPoach wrote: post #58

Earlier quoted context omitted.

It's not an indicator problem, it's a problem of people trying to time markets. Also, there are two ways to use the Buffet Indicator - right and wrong. The wrong way is to say 'it's overvalued, I should do something - short the market'. The right way is 'it's overvalues, I should avoid doing something - buying overvalued stocks'. Buffett has been sitting on piles of cash in the past for years and years, avoiding buyi…

> sitting on piles of cash in the past for years and years, avoiding buying securities when they are overvalued. He never tried timing the market, simply waiting for the right moment. It’s not quite clear what you’re trying to say here, because if you popped into a newbie investment forum and said you were sitting on a pile of cash that you were avoiding investing because the market was overvalued, you’d be told that…

One note about idolising Buffet in modern times is that it seems to me any strategy Buffet used to employ is outdated.

Any simple metrics, or indicators you can think of are already priced in by algorithms so the only possibility to gain an edge would be to have some very specific niche knowledge or inside information, or you must have even better algorithm that considers more variables.

Any success not stemming from those things can't really be attributed to anything else than luck.

I'd argue, Buffet even if young, couldn't do the same today, that he did in the past.

If there's a successful pattern discovered it will be used until there won't be any more profits available from being able to read this pattern. And these patterns get more and more complicated as time goes on, for an hobbyist investor there's absolutely no way, to do some technical analysis and find a profitable idea.

Re: The Buffett Indicator

#90

Post by mewpmewp2 »

roenxi wrote: post #70
paulmd wrote: post #68

Earlier quoted context omitted.

> sitting on piles of cash in the past for years and years, avoiding buying securities when they are overvalued. He never tried timing the market, simply waiting for the right moment. It’s not quite clear what you’re trying to say here, because if you popped into a newbie investment forum and said you were sitting on a pile of cash that you were avoiding investing because the market was overvalued, you’d be told that…

The denizens of the investor forum would be wrong; it isn't trying to time the market. This strategy is simply valuing the stocks. The problem with the plan is that holding piles of cash is a game for losers; you need the money to be in some sort of asset - it matters not what - to avoid the printers of the central banks. There is a real chance that stock prices never come down as much as everything else goes up.

As a sole investor you can't in modern day value stocks more accurately than their current market cap.

Any difference in valuation you come up with compared to the market cap would simply mean that there's something missing in your calculations that makes up the difference, as the stock and its market cap is coming from thousands of times more complicated methods for valuing the stock than whatever few metrics you were able to consider.

Essentially by using some sort of method to value a stock, you can only fool yourself to think that you know what you are doing and are skilled beyond luck. Because you are competing against institutions with state of the art tools, researchers and experience.

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