Buffett "Key Indicator" near dangerous all-time high...

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Buffett "Key Indicator" near dangerous all-time high...

Post by slipp1229 » Tue Oct 31, 2017 4:17 pm

Interesting the Oracle of Omaha would warn equity investors are "Playing with Fire" due to his key overvaluation metric nearing an all time high:

"Buffett indicator is the total market capitalization of all U.S. stocks relative to the country’s gross domestic product. When it’s in the 70% to 80% range, it’s go time. When it moves well above 100%, it’s time to tap the brakes. The metric sits at almost 139% at the moment, which is getting awfully close to the record 145% it hit during the peak of the dot-com bubble in 2000, the only other time the number has been this high"

Didn't he just recently state publicly the market still had room to run? :confused

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by pollifax » Tue Oct 31, 2017 4:29 pm

One major difference between now and the 2000 dotcom bubble time is that interest rates were a lot higher then than they are right now. Does that mean the market won't tank tomorrow? I have no idea.

It does feel as if valuations are high right now, but really, nobody knows exactly what will happen. Prices could keep going up, or they could go down. I've set my allocation to where I won't panic if there's a correction/crash/bear market and intend to stay the course. I can't really control anything else, so I might as quit trying, buckle up, and get ready to rebalance as necessary.

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by FIREchief » Tue Oct 31, 2017 4:50 pm

Why would we tie US stock performance (determined by global business activity) to only the US GDP?
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by nisiprius » Tue Oct 31, 2017 5:06 pm

IMPORTANT: this is someone named Shawn Langlois talking, not Warren Buffett.

It may well be correct that
Warren Buffett once described his favorite market indicator as "the best single measure of where valuations stand at any given moment" and that when the metric exceeds certain levels, like it did back in 2000, "you are playing with fire."
but I would feel a lot happier if he cited his source so that we could read Buffett's exact words... in context.

Buffett's remarks, unfortunately, are often less than clear... and there are too many commentators who are all too willing to clarify them. To take just one, Buffett never said "volatility is not risk." Another example: Buffett, speaking of his wife's trust,
My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's).
He has as far as I know never made it clear whether this is good advice for everyone or just his wife's trustee; and whether his advice to investors (other than his wife's trustee) is to positively avoid international stocks and small-caps.
Last edited by nisiprius on Tue Oct 31, 2017 7:30 pm, edited 1 time in total.
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by TheNightsToCome » Tue Oct 31, 2017 5:26 pm

nisiprius wrote:
Tue Oct 31, 2017 5:06 pm
IMPORTANT: this is someone named Shawn Langlois talking, not Warren Buffett.

It may well be correct that
Warren Buffett once described his favorite market indicator as "the best single measure of where valuations stand at any given moment" and that when the metric exceeds certain levels, like it did back in 2000, "you are playing with fire."
but I would feel a lot happier if he cited his source so that we could read Buffett's exact words... in context.

Buffett's remarks, unfortunately, are often less than clear... and there are too many commentators who are all too willing to clarify them. To take just one, Buffett never said "volatility is not risk." Another example: Buffett, speaking of his wife's trust,
My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's).
He has as far as I know never made it clear whether this is good advice for everyone or just his wife's trustee; whether this suggestion means that the trustee should invest in the U.S. only; whether this suggestion means that the trustee should not invest in any small-caps.
Here are Buffett's words:

"On a macro basis, quantification doesn't have to be complicated at all. Below is a chart, starting almost 80 years ago and really quite fundamental in what it says. The chart shows the market value of all publicly traded securities as a percentage of the country's business--that is, as a percentage of GNP. The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment. And as you can see, nearly two years ago the ratio rose to an unprecedented level. That should have been a very strong warning signal.

For investors to gain wealth at a rate that exceeds the growth of U.S. business, the percentage relationship line on the chart must keep going up and up. If GNP is going to grow 5% a year and you want market values to go up 10%, then you need to have the line go straight off the top of the chart. That won't happen.

For me, the message of that chart is this: If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%--as it did in 1999 and a part of 2000--you are playing with fire. As you can see, the ratio was recently 133%."


Here is the larger context: http://archive.fortune.com/magazines/fo ... /index.htm.

And here is the original article alluded to in the 2001 Fortune article: http://archive.fortune.com/magazines/fo ... /index.htm.

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by abuss368 » Tue Oct 31, 2017 5:28 pm

I have never heard of this metric and find this quite interesting.
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by baw703916 » Tue Oct 31, 2017 5:35 pm

We keep hearing that we don't need no stinkin' foreign stocks because the S&P 500 companies get half of their revenue from international operations. So why not just divide by two and then the valuation is 67% of US GDP, and a bargain! :D
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by slipp1229 » Tue Oct 31, 2017 6:00 pm

Excellent further clarification. Interesting indeed!

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by nisiprius » Tue Oct 31, 2017 6:29 pm

TheNightsToCome wrote:
Tue Oct 31, 2017 5:26 pm
nisiprius wrote:
Tue Oct 31, 2017 5:06 pm
IMPORTANT: this is someone named Shawn Langlois talking, not Warren Buffett...I would feel a lot happier if he cited his source so that we could read Buffett's exact words... in context.
Here are Buffett's words...
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by nedsaid » Tue Oct 31, 2017 6:43 pm

slipp1229 wrote:
Tue Oct 31, 2017 4:17 pm
Interesting the Oracle of Omaha would warn equity investors are "Playing with Fire" due to his key overvaluation metric nearing an all time high:

"Buffett indicator is the total market capitalization of all U.S. stocks relative to the country’s gross domestic product. When it’s in the 70% to 80% range, it’s go time. When it moves well above 100%, it’s time to tap the brakes. The metric sits at almost 139% at the moment, which is getting awfully close to the record 145% it hit during the peak of the dot-com bubble in 2000, the only other time the number has been this high"

Didn't he just recently state publicly the market still had room to run? :confused
If you haven't rebalanced your portfolio in a while, this looks like a good time.
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by knpstr » Tue Oct 31, 2017 6:49 pm

nisiprius wrote:
Tue Oct 31, 2017 5:06 pm
IMPORTANT: this is someone named Shawn Langlois talking, not Warren Buffett.

It may well be correct that
Warren Buffett once described his favorite market indicator as "the best single measure of where valuations stand at any given moment" and that when the metric exceeds certain levels, like it did back in 2000, "you are playing with fire."
but I would feel a lot happier if he cited his source so that we could read Buffett's exact words... in context.

Buffett's remarks, unfortunately, are often less than clear... and there are too many commentators who are all too willing to clarify them. To take just one, Buffett never said "volatility is not risk." Another example: Buffett, speaking of his wife's trust,
My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's).
He has as far as I know never made it clear whether this is good advice for everyone or just his wife's trustee; whether this suggestion means that the trustee should invest in the U.S. only; whether this suggestion means that the trustee should not invest in any small-caps.
Warren Buffett's 2014 Letter to shareholders, pg.18 paragraph 7: "Volatility is far from synonymous with risk."

CNBC's Becky Quick interview Warren Buffett March 3, 2014: "But I've told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there's a terrible period in the market and she's withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She'll do fine with that. And anybody will do fine with that. It's low-cost, it's in a bunch of wonderful businesses and it takes care of itself." (emphasis mine)

:beer

EDIT: also in my view it is clear that the trustee NOT invest in outside the U.S. or small caps. When the will says to put 90/10 in S&P500/Short-term govt bonds that is a complete (100%) instruction.
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by triceratop » Tue Oct 31, 2017 7:04 pm

knpstr wrote:
Tue Oct 31, 2017 6:49 pm
nisiprius wrote:
Tue Oct 31, 2017 5:06 pm
IMPORTANT: this is someone named Shawn Langlois talking, not Warren Buffett.

It may well be correct that
Warren Buffett once described his favorite market indicator as "the best single measure of where valuations stand at any given moment" and that when the metric exceeds certain levels, like it did back in 2000, "you are playing with fire."
but I would feel a lot happier if he cited his source so that we could read Buffett's exact words... in context.

Buffett's remarks, unfortunately, are often less than clear... and there are too many commentators who are all too willing to clarify them. To take just one, Buffett never said "volatility is not risk." Another example: Buffett, speaking of his wife's trust,
My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's).
He has as far as I know never made it clear whether this is good advice for everyone or just his wife's trustee; whether this suggestion means that the trustee should invest in the U.S. only; whether this suggestion means that the trustee should not invest in any small-caps.
Warren Buffett's 2014 Letter to shareholders, pg.18 paragraph 7: "Volatility is far from synonymous with risk."

CNBC's Becky Quick interview Warren Buffett March 3, 2014: "But I've told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there's a terrible period in the market and she's withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She'll do fine with that. And anybody will do fine with that. It's low-cost, it's in a bunch of wonderful businesses and it takes care of itself." (emphasis mine)

:beer

EDIT: also in my view it is clear that the trustee NOT invest in outside the U.S. or small caps. When the will says to put 90/10 in S&P500/Short-term govt bonds that is a complete (100%) instruction.
Saying that 90/10 S&P500/Treasuries will do fine is not the same as saying NOT to invest in U.S. or small caps (I agree it will do fine; yet I invest in both of those). This is another point that is often missed about Buffettisms.
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by knpstr » Tue Oct 31, 2017 7:14 pm

triceratop wrote:
Tue Oct 31, 2017 7:04 pm
Saying that 90/10 S&P500/Treasuries will do fine is not the same as saying NOT to invest in U.S. or small caps (I agree it will do fine; yet I invest in both of those). This is another point that is often missed about Buffettisms.
The person above said it was never made clear "...whether the trustee should not invest in any small caps"

Well if the trustee is told to invest 100% in S&P500 and Treasuries at 90/10, then I think that is ipso facto made clear to NOT invest in small caps or international, no?
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by spectec » Tue Oct 31, 2017 7:15 pm

H-m-m. I though 10% US Treasuries and 90% S&P would add up to 100%. Maybe that means the trustee can put anything over 100% in something else... (International, small cap, etc)
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by triceratop » Tue Oct 31, 2017 7:26 pm

knpstr wrote:
Tue Oct 31, 2017 7:14 pm
triceratop wrote:
Tue Oct 31, 2017 7:04 pm
Saying that 90/10 S&P500/Treasuries will do fine is not the same as saying NOT to invest in U.S. or small caps (I agree it will do fine; yet I invest in both of those). This is another point that is often missed about Buffettisms.
The person above said it was never made clear "...whether the trustee should not invest in any small caps"

Well if the trustee is told to invest 100% in S&P500 and Treasuries at 90/10, then I think that is ipso facto made clear to NOT invest in small caps or international, no?
That is true but it is also true that many more people know what the S&P500 is than a "fund tracking the CRSP Total Stock Market index".

I certainly wouldn't take "you'll do just fine with X" as saying explicitly "you cannot improve on X".

So no it isn't clear at all. The fact is he Buffett has never to my knowledge clarified this point. Nor, even if he had, would it make a difference unless he had convincing reasons (him being Warren Buffett is not a convincing reason)
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by nisiprius » Tue Oct 31, 2017 7:27 pm

knpstr wrote:
Tue Oct 31, 2017 7:14 pm
triceratop wrote:
Tue Oct 31, 2017 7:04 pm
Saying that 90/10 S&P500/Treasuries will do fine is not the same as saying NOT to invest in U.S. or small caps (I agree it will do fine; yet I invest in both of those). This is another point that is often missed about Buffettisms.
The person above said it was never made clear "...whether the trustee should not invest in any small caps"

Well if the trustee is told to invest 100% in S&P500 and Treasuries at 90/10, then I think that is ipso facto made clear to NOT invest in small caps or international, no?
Yes, you are correct. I'll go back and try to wordsmith what I said a bit.
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by nisiprius » Tue Oct 31, 2017 7:34 pm

knpstr wrote:
Tue Oct 31, 2017 6:49 pm
nisiprius wrote:To take just one, Buffett never said "volatility is not risk."
Warren Buffett's 2014 Letter to shareholders, pg.18 paragraph 7: "Volatility is far from synonymous with risk."
Yes. That is quite a different statement. And the context is important, too:
That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.
He's saying that they are often equated--by business schools and "popular formulas" and that they should not be. But he is not saying "volatility is not risk." I guess I will do the same thing I've been complaining about and try to translate his words, but I take him to mean "volatility is only one aspect of risk; it's not the whole thing; and not even the most important thing."
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by knpstr » Tue Oct 31, 2017 8:13 pm

nisiprius wrote:
Tue Oct 31, 2017 7:34 pm
knpstr wrote:
Tue Oct 31, 2017 6:49 pm
nisiprius wrote:To take just one, Buffett never said "volatility is not risk."
Warren Buffett's 2014 Letter to shareholders, pg.18 paragraph 7: "Volatility is far from synonymous with risk."
Yes. That is quite a different statement. And the context is important, too:
That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.
He's saying that they are often equated--by business schools and "popular formulas" and that they should not be. But he is not saying "volatility is not risk." I guess I will do the same thing I've been complaining about and try to translate his words, but I take him to mean "volatility is only one aspect of risk; it's not the whole thing; and not even the most important thing."
Of course he isn't saying volatility is not risk, or rather never risk, but for long term investors, it is not a "risk" they should be worried about. "For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines (read: volatility) are unimportant." parentheses mine

Those who need to worry about volatility in his view:
"It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. That is relevant to certain investors – say, investment banks – whose viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds
should keep appropriate sums in Treasuries or insured bank deposits.
" (emphasis mine)

Both quotes again from 2014 letter. The last underline further exemplifies his 90/10 portfolio. As he has said (quoted above) anybody will do fine with that ratio. One can infer he deems the otherwise vague "appropriate" sums in retirement to be 10% "cash" when one using a 3%-4% withdrawal rate, evidence of this is that is what is laid out for his wife. So approximately 3.3-2.5 years of expenses in "cash" can be deduced from those instructions.

However, in other interviews (which I cannot quote off the top of my head) he has said that a person should hold as much in cash/bonds as they need to sleep well at night. The rest should be in the S&P 500.

One could infer from these statements that Buffett thinks 90/10 is optimal for everyone. However, if 90/10 is giving you an ulcer or causing you to lose sleep, insofar you don't have the proper temperament, then put more in cash/bonds. The general point being, to keep as little in cash/bonds as one can tolerate is the proper course of action.

A 30 year old with a million dollars need not to do 60/40 "just to smooth the ride". In fact, this was his advice to such that very scenario of what he'd do in BRK annual meeting question: "I'd put it all in a S&P 500 index fund and get back to work."
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by knpstr » Tue Oct 31, 2017 8:27 pm

triceratop wrote:
Tue Oct 31, 2017 7:26 pm
knpstr wrote:
Tue Oct 31, 2017 7:14 pm
triceratop wrote:
Tue Oct 31, 2017 7:04 pm
Saying that 90/10 S&P500/Treasuries will do fine is not the same as saying NOT to invest in U.S. or small caps (I agree it will do fine; yet I invest in both of those). This is another point that is often missed about Buffettisms.
The person above said it was never made clear "...whether the trustee should not invest in any small caps"

Well if the trustee is told to invest 100% in S&P500 and Treasuries at 90/10, then I think that is ipso facto made clear to NOT invest in small caps or international, no?
That is true but it is also true that many more people know what the S&P500 is than a "fund tracking the CRSP Total Stock Market index".

I certainly wouldn't take "you'll do just fine with X" as saying explicitly "you cannot improve on X".

So no it isn't clear at all. The fact is he Buffett has never to my knowledge clarified this point. Nor, even if he had, would it make a difference unless he had convincing reasons (him being Warren Buffett is not a convincing reason)
Of COURSE he thinks one can do better than 90/10 suggestion, he is living proof of that! He doesn't do 90/10 for himself, hahaha

For the average investor: I cannot direct you toward a specific quote but I can tell you why he would caution against "dabbling" (I've read a LOT of Buffett).

He'd caution in "trying to do better" one may "dance in and out" with their money and lower their returns. So if you want to tilt with small caps now, then in 2 years say maybe it's emerging markets now, 3 years now it's China, etc... a person can harm themselves as a result. He'd say it isn't necessary, doesn't need to be that complicated.

It is a fair opinion to hold that Warren Buffett doesn't know what is best for you so you aren't going to follow his advice. But to say that he has not made clear what he thinks the average investor should do, that is just flat out not true. He has clearly given that recommendation.

I know Charlie Munger would say if you want above average returns you should look into stock picking, just don't be surprised if you aren't as smart as you think you are.
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by Nate79 » Tue Oct 31, 2017 9:19 pm

It's funny. When I do a Google search on this topic I find the same statement going back at least 3 years.

Personally I find it a ridiculous metric.

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by triceratop » Tue Oct 31, 2017 9:24 pm

knsptr wrote:
But to say that he has not made clear what he thinks the average investor should do, that is just flat out not true.
Fortunately I never said that, if you look back at my statements.

Also, China is in my emerging markets index. And diversifying to international and small caps is nowhere close to "dabbling". Furthermore, holding small caps in a total market fund is not tilting, at all. Total Stock Market is the opposite of tilting. Ditto for holding Total International.

I doubt anything I will say will change your mind though, so I'll bow out of this conversation.
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by TheNightsToCome » Tue Oct 31, 2017 9:29 pm

Nate79 wrote:
Tue Oct 31, 2017 9:19 pm
It's funny. When I do a Google search on this topic I find the same statement going back at least 3 years.

Personally I find it a ridiculous metric.
Three years is a nanosecond in stock market investing.

Edit: However, I don't mean to imply that Market Cap / GDP is an especially useful valuation metric, only that valid valuation metrics do have implications for long-term stock returns; e.g., 12-20 years.

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by TheTimeLord » Tue Oct 31, 2017 9:35 pm

slipp1229 wrote:
Tue Oct 31, 2017 4:17 pm
Interesting the Oracle of Omaha would warn equity investors are "Playing with Fire" due to his key overvaluation metric nearing an all time high:

"Buffett indicator is the total market capitalization of all U.S. stocks relative to the country’s gross domestic product. When it’s in the 70% to 80% range, it’s go time. When it moves well above 100%, it’s time to tap the brakes. The metric sits at almost 139% at the moment, which is getting awfully close to the record 145% it hit during the peak of the dot-com bubble in 2000, the only other time the number has been this high"

Didn't he just recently state publicly the market still had room to run? :confused
Here I was having a great day after the market finished a great October and I see this. Now should I panic, sell everything, I mean it's Warren flipping Buffett? If I didn't have a plan that helped me SWAN this might knock me for a loop, luckily it is water off a duck's back and even if he is right about valuation I know people are rarely correct about valuation and timing at the same time.
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by alwayshedge » Tue Oct 31, 2017 9:45 pm

Honestly, who cares? Nobody knows nothing and there is no point in worrying about it. That metric could go to 1000% for all we know. It's all a bunch of hocus pocus and it seems that we keep seeing these kinds of posts every time the market is making highs.

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by Sandtrap » Tue Oct 31, 2017 9:54 pm

TheTimeLord wrote:
Tue Oct 31, 2017 9:35 pm
slipp1229 wrote:
Tue Oct 31, 2017 4:17 pm
Interesting the Oracle of Omaha would warn equity investors are "Playing with Fire" due to his key overvaluation metric nearing an all time high:

"Buffett indicator is the total market capitalization of all U.S. stocks relative to the country’s gross domestic product. When it’s in the 70% to 80% range, it’s go time. When it moves well above 100%, it’s time to tap the brakes. The metric sits at almost 139% at the moment, which is getting awfully close to the record 145% it hit during the peak of the dot-com bubble in 2000, the only other time the number has been this high"

Didn't he just recently state publicly the market still had room to run? :confused
Here I was having a great day after the market finished a great October and I see this. Now should I panic, sell everything, I mean it's Warren flipping Buffett? If I didn't have a plan that helped me SWAN this might knock me for a loop, luckily it is water off a duck's back and even if he is right about valuation I know people are rarely correct about valuation and timing at the same time.
I don't think I should panic. But the article makes sense. . .so maybe I should panic. Or go all in from Vanguard to Berkshire Hathaway. :shock:

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by FIREchief » Tue Oct 31, 2017 11:15 pm

baw703916 wrote:
Tue Oct 31, 2017 5:35 pm
We keep hearing that we don't need no stinkin' foreign stocks because the S&P 500 companies get half of their revenue from international operations. So why not just divide by two and then the valuation is 67% of US GDP, and a bargain! :D
Yeah. Exactly this. I tried to say the same (sorta) thing, but you did it much better! :sharebeer
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by baw703916 » Tue Oct 31, 2017 11:31 pm

FIREchief wrote:
Tue Oct 31, 2017 11:15 pm
baw703916 wrote:
Tue Oct 31, 2017 5:35 pm
We keep hearing that we don't need no stinkin' foreign stocks because the S&P 500 companies get half of their revenue from international operations. So why not just divide by two and then the valuation is 67% of US GDP, and a bargain! :D
Yeah. Exactly this. I tried to say the same (sorta) thing, but you did it much better! :sharebeer
Yeah, I liked your post and thought I'd reiterate the point! :sharebeer
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by whodidntante » Tue Oct 31, 2017 11:36 pm

Well, here we go again.

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by jalbert » Tue Oct 31, 2017 11:46 pm

I think this excerpt from Mr. Buffett's 2014 letter to Berkshire stockholders sums up his view of large caps vs, say small value stocks:
Warren Buffett wrote: My cigar-butt strategy worked very well while I was managing small sums. Indeed, the many dozens of free puffs I obtained in the 1950s made that decade by far the best of my life for both relative and absolute investment performance.

Even then, however, I made a few exceptions to cigar butts, the most important being GEICO. Thanks to a 1951 conversation I had with Lorimer Davidson, a wonderful man who later became CEO of the company, I learned that GEICO was a terrific business and promptly put 65% of my $9,800 net worth into its shares. Most of my gains in those early years, though, came from investments in mediocre companies that traded at bargain prices. Ben Graham had taught me that technique, and it worked.

But a major weakness in this approach gradually became apparent: Cigar-butt investing was scalable only to a point. With large sums, it would never work well. In addition, though marginal businesses purchased at cheap prices may be attractive as short-term investments, they are the wrong foundation on which to build a large and enduring enterprise.
From: http://www.berkshirehathaway.com/letters/2014ltr.pdf
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by CaliJim » Tue Oct 31, 2017 11:56 pm

nedsaid wrote:
Tue Oct 31, 2017 6:43 pm
slipp1229 wrote:
Tue Oct 31, 2017 4:17 pm
Interesting the Oracle of Omaha would warn equity investors ....
If you haven't rebalanced your portfolio in a while, this looks like a good time.
+1

just did that.

and in my case...I also took my equity allocation down a couple of points...in keeping with my "age in bonds less a few" AA glide path.

nothing scientific...just did a gut check and the gut said "a 50% drop in equities, with your current allocation to equities, would freak you out". so i got off my duff, adjusted my targets 5%, and made a few trades. i was going to wait till next year to avoid CG taxes this year... but then I figured, I'm going to owe them sooner or later...may as well just rebalance now.

i'm not greedy. and at this point, avoiding down-side risk is more important than leaving a legacy.
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by JBTX » Wed Nov 01, 2017 9:06 am

FIREchief wrote:
Tue Oct 31, 2017 4:50 pm
Why would we tie US stock performance (determined by global business activity) to only the US GDP?
One would think over the long term, if you believe in efficient markets and "the invisible hand" that at least over the long term these metrics will tend to mean revert. Why would we think the US can perpetually suck the profits out of other worldwide countries without them either reacting economically by creating competitive domestic alternatives, or geopolitically through exchange rates/trade wars, etc? While it is true that almost half of S&P500 revenue/earnings comes from international, it is also true that we import a lot of stuff, and I don't know the comparative metric is for countries outside of the US is. The S&P may get half from outside our borders, but it could be that the S&P only accounts for half of the earnings realized on United states business.
Nate79 wrote:
Tue Oct 31, 2017 9:19 pm
It's funny. When I do a Google search on this topic I find the same statement going back at least 3 years.

Personally I find it a ridiculous metric.

It is probably a more pure long term metric than stuff like P/E ratios, Price to book ratios, etc which are dependent upon manufactured numbers based upon the whims of various accounting regulartory bodies, as well as our fluctuating willingness to enforce those regulations on companies (think Enron). Conceptually you would not think over the long term investment in equities would become a permanently larger percent of the economy - by multiples of 2 to 3 times.

That's not to say this metric is likely to reverse in the short term, or 3 years, or maybe even decades. There are structural factors pushing the metric up - low interest rates (which tend to last for long periods of times post financial crises), the confluence of labor reducing technology and access to cheap worldwide global labor, worldwide 'savings glut" and our recent trend towards oligopoly, which tends to lead to higher profit margins (and higher valuations>>higher stock market/GDP. While it is unlikely any of those factors will change soon, there is always the chance that geopolitical events, such as a surge in worldwide populism, could cause a relatively quick reversal.

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by nedsaid » Wed Nov 01, 2017 9:52 am

CaliJim wrote:
Tue Oct 31, 2017 11:56 pm
nedsaid wrote:
Tue Oct 31, 2017 6:43 pm
slipp1229 wrote:
Tue Oct 31, 2017 4:17 pm
Interesting the Oracle of Omaha would warn equity investors ....
If you haven't rebalanced your portfolio in a while, this looks like a good time.
+1

just did that.

and in my case...I also took my equity allocation down a couple of points...in keeping with my "age in bonds less a few" AA glide path.

nothing scientific...just did a gut check and the gut said "a 50% drop in equities, with your current allocation to equities, would freak you out". so i got off my duff, adjusted my targets 5%, and made a few trades. i was going to wait till next year to avoid CG taxes this year... but then I figured, I'm going to owe them sooner or later...may as well just rebalance now.

i'm not greedy. and at this point, avoiding down-side risk is more important than leaving a legacy.
Good for you. Rebalancing is like cleanliness around here, next to Godliness. :wink: I suppose you remember anniversaries and call Mom on Mothers' Day.
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by HomerJ » Wed Nov 01, 2017 9:58 am

TheNightsToCome wrote:
Tue Oct 31, 2017 9:29 pm
Three years is a nanosecond in stock market investing.
I have no idea what you mean by that. My investing lifetime is only 60 years. My retirement investing lifetime is only 30 years. 3 years is not a "nano-second".

We're not talking about geology here.

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Re: Buffett "Key Indicator" near dangerous all-time high...

Post by nedsaid » Wed Nov 01, 2017 10:03 am

In another thread about the buffet indicator, it appears that in response to high US Valuations, Livesoft is overweighting towards Indian restaurants. My theory his reasoning is based upon the "curry" trade, which Larry Swedroe will discuss in a future article. It has to do with the difference in interest rates here in the United States, borrow cheap here in the US and invest in India. Curry is listed as a factor in Larry's latest book.
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Re: Buffett "Key Indicator" near dangerous all-time high...

Post by triceratop » Wed Nov 01, 2017 10:06 am

Please stay on-topic in this discussion about US Stocks.
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Re: Buffett "Key Indicator" near dangerous all-time high...

Post by nedsaid » Wed Nov 01, 2017 10:19 am

All kidding aside, I have noticed that the valuations on US Stocks seem to be getting rather rich, particularly when you look at trailing P/E ratios based upon historical earnings. Forward P/E ratios based on future estimated earnings look a lot better but Wall Street has been known for excessive optimism from time to time. In another thread, I did some analysis of a few stocks that I own personally and I couldn't help but notice certain things. As others have noted, one big difference between now and early 2000 is that interest rates are a lot lower now than they were then. But there gets to be a point where even an optimist like me starts to notice high valuations hence my recommendation to rebalance. Still, this market is not in euphoria and it doesn't feel like the late 1990's. No stories of people quitting their jobs to take up day trading as there was then.
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by WhiteMaxima » Wed Nov 01, 2017 10:34 am

knpstr wrote:
Tue Oct 31, 2017 6:49 pm
nisiprius wrote:
Tue Oct 31, 2017 5:06 pm
IMPORTANT: this is someone named Shawn Langlois talking, not Warren Buffett.

It may well be correct that
Warren Buffett once described his favorite market indicator as "the best single measure of where valuations stand at any given moment" and that when the metric exceeds certain levels, like it did back in 2000, "you are playing with fire."
but I would feel a lot happier if he cited his source so that we could read Buffett's exact words... in context.

Buffett's remarks, unfortunately, are often less than clear... and there are too many commentators who are all too willing to clarify them. To take just one, Buffett never said "volatility is not risk." Another example: Buffett, speaking of his wife's trust,
My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's).
He has as far as I know never made it clear whether this is good advice for everyone or just his wife's trustee; whether this suggestion means that the trustee should invest in the U.S. only; whether this suggestion means that the trustee should not invest in any small-caps.
Warren Buffett's 2014 Letter to shareholders, pg.18 paragraph 7: "Volatility is far from synonymous with risk."

CNBC's Becky Quick interview Warren Buffett March 3, 2014: "But I've told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there's a terrible period in the market and she's withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She'll do fine with that. And anybody will do fine with that. It's low-cost, it's in a bunch of wonderful businesses and it takes care of itself." (emphasis mine)

:beer

EDIT: also in my view it is clear that the trustee NOT invest in outside the U.S. or small caps. When the will says to put 90/10 in S&P500/Short-term govt bonds that is a complete (100%) instruction.
Suppose you have 90/10 in your 401k and you need to take RMD, how is RMD going to be taken from from 90 or 10? Do you have to sell cheap if the market is bad?

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by knpstr » Wed Nov 01, 2017 11:59 am

WhiteMaxima wrote:
Wed Nov 01, 2017 10:34 am
Suppose you have 90/10 in your 401k and you need to take RMD, how is RMD going to be taken from from 90 or 10? Do you have to sell cheap if the market is bad?
As far as RMD's go you have to withdraw whatever amount by law. If that amount exceeds the amount you wanted to withdrawal for living expenses simply re-invest the difference into a taxable account.

However, the withdrawal part is not clear. What is clear is that the 10% is to be used for withdrawals in "bad markets" - "bad markets" however isn't clearly defined. But that would lead to the assumption that the 90% is to be used in all other periods.

So, for example, if you had $1,000,000 in total and the $900,000 grew at 8% to $972,000 and you withdrew the 4% of initial total $40,000 you'd still have $932,000 in the S&P 500. Meaning the S&P 500 is what is going to give you the "sustaining growth" you need in retirement. The short-term treasuries are essentially the "emergency fund".

Disclaimer: This entire post is speculation, he has not made the "withdrawal instructions" public, to my knowledge anyway.
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by triceratop » Wed Nov 01, 2017 12:03 pm

knpstr wrote:
Wed Nov 01, 2017 11:59 am
WhiteMaxima wrote:
Wed Nov 01, 2017 10:34 am
Suppose you have 90/10 in your 401k and you need to take RMD, how is RMD going to be taken from from 90 or 10? Do you have to sell cheap if the market is bad?
As far as RMD's go you have to withdraw whatever amount by law. If that amount exceeds the amount you wanted to withdrawal for living expenses simply re-invest the difference into a taxable account.

However, the withdrawal part is not clear. What is clear is that the 10% is to be used for withdrawals in "bad markets" - "bad markets" however isn't clearly defined. But that would lead to the assumption that the 90% is to be used in all other periods.

So, for example, if you had $1,000,000 in total and the $900,000 grew at 8% to $972,000 and you withdrew the 4% of initial total $40,000 you'd still have $932,000 in the S&P 500. Meaning the S&P 500 is what is going to give you the "sustaining growth" you need in retirement. The short-term treasuries are essentially the "emergency fund".

Disclaimer: This entire post is speculation, he has not made the "withdrawal instructions" public, to my knowledge anyway.
One can take RMDs and immediately reinvest the after-tax proceeds while maintaining any allocation they like.
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by WhiteMaxima » Wed Nov 01, 2017 12:35 pm

knpstr wrote:
Wed Nov 01, 2017 11:59 am
WhiteMaxima wrote:
Wed Nov 01, 2017 10:34 am
Suppose you have 90/10 in your 401k and you need to take RMD, how is RMD going to be taken from from 90 or 10? Do you have to sell cheap if the market is bad?
As far as RMD's go you have to withdraw whatever amount by law. If that amount exceeds the amount you wanted to withdrawal for living expenses simply re-invest the difference into a taxable account.

However, the withdrawal part is not clear. What is clear is that the 10% is to be used for withdrawals in "bad markets" - "bad markets" however isn't clearly defined. But that would lead to the assumption that the 90% is to be used in all other periods.

So, for example, if you had $1,000,000 in total and the $900,000 grew at 8% to $972,000 and you withdrew the 4% of initial total $40,000 you'd still have $932,000 in the S&P 500. Meaning the S&P 500 is what is going to give you the "sustaining growth" you need in retirement. The short-term treasuries are essentially the "emergency fund".

Disclaimer: This entire post is speculation, he has not made the "withdrawal instructions" public, to my knowledge anyway.
So 10% in bond won't help you in down market. You still draw RMD form 90% portion if market is down.

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by Sandtrap » Wed Nov 01, 2017 12:40 pm

CaliJim wrote:
Tue Oct 31, 2017 11:56 pm
nedsaid wrote:
Tue Oct 31, 2017 6:43 pm
slipp1229 wrote:
Tue Oct 31, 2017 4:17 pm
Interesting the Oracle of Omaha would warn equity investors ....
If you haven't rebalanced your portfolio in a while, this looks like a good time.
+1

just did that.

and in my case...I also took my equity allocation down a couple of points...in keeping with my "age in bonds less a few" AA glide path.

nothing scientific...just did a gut check and the gut said "a 50% drop in equities, with your current allocation to equities, would freak you out". so i got off my duff, adjusted my targets 5%, and made a few trades. i was going to wait till next year to avoid CG taxes this year... but then I figured, I'm going to owe them sooner or later...may as well just rebalance now.

i'm not greedy. and at this point, avoiding down-side risk is more important than leaving a legacy.
Same here. I'm marginally inside of my target bands anyway, equity tilt. Tough to take those "booming equities" and shift to fixed, though. Tough. . . . . . :shock:

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by avalpert » Wed Nov 01, 2017 12:48 pm

WhiteMaxima wrote:
Wed Nov 01, 2017 12:35 pm
knpstr wrote:
Wed Nov 01, 2017 11:59 am
WhiteMaxima wrote:
Wed Nov 01, 2017 10:34 am
Suppose you have 90/10 in your 401k and you need to take RMD, how is RMD going to be taken from from 90 or 10? Do you have to sell cheap if the market is bad?
As far as RMD's go you have to withdraw whatever amount by law. If that amount exceeds the amount you wanted to withdrawal for living expenses simply re-invest the difference into a taxable account.

However, the withdrawal part is not clear. What is clear is that the 10% is to be used for withdrawals in "bad markets" - "bad markets" however isn't clearly defined. But that would lead to the assumption that the 90% is to be used in all other periods.

So, for example, if you had $1,000,000 in total and the $900,000 grew at 8% to $972,000 and you withdrew the 4% of initial total $40,000 you'd still have $932,000 in the S&P 500. Meaning the S&P 500 is what is going to give you the "sustaining growth" you need in retirement. The short-term treasuries are essentially the "emergency fund".

Disclaimer: This entire post is speculation, he has not made the "withdrawal instructions" public, to my knowledge anyway.
So 10% in bond won't help you in down market. You still draw RMD form 90% portion if market is down.
RMD's are not withdrawal from your portfolio - you withdrawal the RMD from stocks in your pre-tax IRA and reinvest them in stocks in a taxable account - the net effect on your portfolio allocation is zero.

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Re: Buffett "Key Indicator" near dangerous all-time high...

Post by PVW » Wed Nov 01, 2017 12:49 pm

slipp1229 wrote:
Tue Oct 31, 2017 4:17 pm
Interesting the Oracle of Omaha would warn equity investors are "Playing with Fire" due to his key overvaluation metric nearing an all time high:

"Buffett indicator is the total market capitalization of all U.S. stocks relative to the country’s gross domestic product. When it’s in the 70% to 80% range, it’s go time. When it moves well above 100%, it’s time to tap the brakes. The metric sits at almost 139% at the moment, which is getting awfully close to the record 145% it hit during the peak of the dot-com bubble in 2000, the only other time the number has been this high"

Didn't he just recently state publicly the market still had room to run? :confused
Trust what you know, not what you feel. It's tough - "I know my senses tell me lies, but I believe the things I feel", Highway by Mike Finnigan and Jerry Wood. Investors must always be vigilant about acting on things they feel instead of things they know.

Except for basic boglehead philosophy, I'm not smart enough to evaluate any investment philosophies or market indicators on their merits. One of my investing tenets is that I don't trust anyone to beat the market - even Warren Buffett. The risk is too great to put my trust in anyone else. So the best I can hope for is to match the market, minus some small expense ratios.

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by TheTimeLord » Wed Nov 01, 2017 12:52 pm

Sandtrap wrote:
Wed Nov 01, 2017 12:40 pm
CaliJim wrote:
Tue Oct 31, 2017 11:56 pm
nedsaid wrote:
Tue Oct 31, 2017 6:43 pm
slipp1229 wrote:
Tue Oct 31, 2017 4:17 pm
Interesting the Oracle of Omaha would warn equity investors ....
If you haven't rebalanced your portfolio in a while, this looks like a good time.
+1

just did that.

and in my case...I also took my equity allocation down a couple of points...in keeping with my "age in bonds less a few" AA glide path.

nothing scientific...just did a gut check and the gut said "a 50% drop in equities, with your current allocation to equities, would freak you out". so i got off my duff, adjusted my targets 5%, and made a few trades. i was going to wait till next year to avoid CG taxes this year... but then I figured, I'm going to owe them sooner or later...may as well just rebalance now.

i'm not greedy. and at this point, avoiding down-side risk is more important than leaving a legacy.
Same here. I'm marginally inside of my target bands anyway, equity tilt. Tough to take those "booming equities" and shift to fixed, though. Tough. . . . . . :shock:
10 years ago I would have never believed I would have as conservative an AA as I have currently. But when I look at the actual dollar amounts allocated instead of the percentages I think I will still make plenty if the Bull continues to run, why risk more? Why risk having to cutback in the early, healthy years of my retirement because of a pullback just to so I might have a few more dollars to be divided up after I am gone.
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by midareff » Wed Nov 01, 2017 12:55 pm

nedsaid wrote:
Tue Oct 31, 2017 6:43 pm
slipp1229 wrote:
Tue Oct 31, 2017 4:17 pm
Interesting the Oracle of Omaha would warn equity investors are "Playing with Fire" due to his key overvaluation metric nearing an all time high:

"Buffett indicator is the total market capitalization of all U.S. stocks relative to the country’s gross domestic product. When it’s in the 70% to 80% range, it’s go time. When it moves well above 100%, it’s time to tap the brakes. The metric sits at almost 139% at the moment, which is getting awfully close to the record 145% it hit during the peak of the dot-com bubble in 2000, the only other time the number has been this high"

Didn't he just recently state publicly the market still had room to run? :confused
If you haven't rebalanced your portfolio in a while, this looks like a good time.
Re-balanced yesterday, which probably guarantees a run up..

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by knpstr » Wed Nov 01, 2017 1:38 pm

WhiteMaxima wrote:
Wed Nov 01, 2017 12:35 pm
So 10% in bond won't help you in down market. You still draw RMD form 90% portion if market is down.
When one is a flexible withdrawal rate of 3-4% having 10% in cash allows one to withdrawal solely from that for 2.5 year to 3.3 years. That should very much "help".

Previous SWR discussion have shown that 90/10 is surprisingly robust in surviving crashes and thriving thereafter, but the ride still may be too uncomfortable for some. Part of this is that it is has added protection on the "upside". Meaning 90% in stocks will grow faster than say 60% in stocks and thus have more margin to lose.

However, it is not clear at what point one should switch from what account they withdrawal from.
After the market drops 10% from previous peak? After 20%? Who knows.
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by nedsaid » Wed Nov 01, 2017 1:40 pm

midareff wrote:
Wed Nov 01, 2017 12:55 pm
nedsaid wrote:
Tue Oct 31, 2017 6:43 pm
slipp1229 wrote:
Tue Oct 31, 2017 4:17 pm
Interesting the Oracle of Omaha would warn equity investors are "Playing with Fire" due to his key overvaluation metric nearing an all time high:

"Buffett indicator is the total market capitalization of all U.S. stocks relative to the country’s gross domestic product. When it’s in the 70% to 80% range, it’s go time. When it moves well above 100%, it’s time to tap the brakes. The metric sits at almost 139% at the moment, which is getting awfully close to the record 145% it hit during the peak of the dot-com bubble in 2000, the only other time the number has been this high"

Didn't he just recently state publicly the market still had room to run? :confused
If you haven't rebalanced your portfolio in a while, this looks like a good time.
Re-balanced yesterday, which probably guarantees a run up..
Yep. The dreaded "Nedsaid effect." I don't like to rebalance for that reason but I am 58 and need to control the amount of risk I am taking in my portfolio.
A fool and his money are good for business.

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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by midareff » Wed Nov 01, 2017 1:58 pm

nedsaid wrote:
Wed Nov 01, 2017 1:40 pm
midareff wrote:
Wed Nov 01, 2017 12:55 pm
nedsaid wrote:
Tue Oct 31, 2017 6:43 pm
slipp1229 wrote:
Tue Oct 31, 2017 4:17 pm
Interesting the Oracle of Omaha would warn equity investors are "Playing with Fire" due to his key overvaluation metric nearing an all time high:

"Buffett indicator is the total market capitalization of all U.S. stocks relative to the country’s gross domestic product. When it’s in the 70% to 80% range, it’s go time. When it moves well above 100%, it’s time to tap the brakes. The metric sits at almost 139% at the moment, which is getting awfully close to the record 145% it hit during the peak of the dot-com bubble in 2000, the only other time the number has been this high"

Didn't he just recently state publicly the market still had room to run? :confused
If you haven't rebalanced your portfolio in a while, this looks like a good time.
Re-balanced yesterday, which probably guarantees a run up..
Yep. The dreaded "Nedsaid effect." I don't like to rebalance for that reason but I am 58 and need to control the amount of risk I am taking in my portfolio.
Not only did I rebalance equities to FI, which had crept to nearly 50/50 and is now back to roughly 46/51/3, equities bonds cash. I also rebalanced US to International, increasing my AA to International from roughly 30% to roughly 38%. Early next January I will revisit AA again as some equities will be past short term capital gains. It's truly been a splendid year in the market and my SWAN was nearing a NO NO point.

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CaliJim
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by CaliJim » Wed Nov 01, 2017 2:00 pm

knpstr wrote:
Wed Nov 01, 2017 1:38 pm
WhiteMaxima wrote:
Wed Nov 01, 2017 12:35 pm
So 10% in bond won't help you in down market. You still draw RMD form 90% portion if market is down.
When one [has] a flexible withdrawal rate of 3-4% having 10% in cash allows one to withdrawal solely from that for 2.5 year to 3.3 years. That should very much "help".

Previous SWR discussion have shown that 90/10 is surprisingly robust in surviving crashes and thriving thereafter...
Yes, help, but.... I keep thinking about the Nikkei index.

Would 90/10 have kept you from dipping into Equity had you retired in 1990, with most investments in the Nikkei?

Image

US future could be like Nikkei past.

I keep reminding myself that my need for risk is low. YMMV.
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CaliJim
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Re: Buffet "Key Indicator" near dangerous all-time high...

Post by CaliJim » Wed Nov 01, 2017 2:13 pm

midareff wrote:
Wed Nov 01, 2017 1:58 pm
Not only did I rebalance equities to FI, which had crept to nearly 50/50 and is now back to roughly 46/51/3, equities bonds cash. I also rebalanced US to International, increasing my AA to International from roughly 30% to roughly 38%. Early next January I will revisit AA again as some equities will be past short term capital gains. It's truly been a splendid year in the market and my SWAN was nearing a NO NO point.
We are very similar:
59yo
45/55 Equity/FI

Of that:
Equity: 60/40 US/Intl
FI: 75/10/15 Intermediate Term Nominal/Short Term Tip/Short Term Nominal
I need to keep simplifying. Short Term Tips AND Short Term Nominals seems redundant. But that's another topic.

Ignoring the media is hard. But it is useful to motivate one to do the math, see if you are outside your target ranges, and rebalance.
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