Stocks/Bond Allocation Based on Buffet Indicator?

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urizaf
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Stocks/Bond Allocation Based on Buffet Indicator?

Post by urizaf » Fri Jun 14, 2019 4:07 pm

I have two questions regarding all the data I bring here:

1. Is a Stocks/Bonds evaluation based on Buffet indicator logical?
2. What percentage would you currently own of stocks and bonds at the moment??

Buffet indicator is :
percentage of total US market cap (TMC) relative to the U.S. GNP.

quoting:
https://www.gurufocus.com/stock-market-valuations.php

"As of 2019-06-14 (updates daily):
The Stock Market is Significantly Overvalued. Based on historical ratio of total market cap over GDP (currently at 140.7%), it is likely to return -1.9% a year from this level of valuation, including dividends. "

"the highest point was 148% during the tech bubble in 2000."


Additionally according to :
https://www.gurufocus.com/shiller-PE.php

"Shiller P/E: 29.8 ( %)
Shiller P/E is 75.3% higher than the historical mean of 17
Implied future annual return: -1.8%
Regular P/E: 21 (historical mean: 16.1)"

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vineviz
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by vineviz » Fri Jun 14, 2019 4:33 pm

urizaf wrote:
Fri Jun 14, 2019 4:07 pm
I have two questions regarding all the data I bring here:

1. Is a Stocks/Bonds evaluation based on Buffet indicator logical?
Not even a little bit logical. There is no inherent relationship between market cap and GDP, therefore no reason to expect one should predict the other.

urizaf wrote:
Fri Jun 14, 2019 4:07 pm
2. What percentage would you currently own of stocks and bonds at the moment??
Whatever a careful evaluation of my risk tolerance and investment goals suggested.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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urizaf
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by urizaf » Fri Jun 14, 2019 4:48 pm

vineviz wrote:
Fri Jun 14, 2019 4:33 pm
urizaf wrote:
Fri Jun 14, 2019 4:07 pm
I have two questions regarding all the data I bring here:

1. Is a Stocks/Bonds evaluation based on Buffet indicator logical?
Not even a little bit logical. There is no inherent relationship between market cap and GDP, therefore no reason to expect one should predict the other.

urizaf wrote:
Fri Jun 14, 2019 4:07 pm
2. What percentage would you currently own of stocks and bonds at the moment??
Whatever a careful evaluation of my risk tolerance and investment goals suggested.
Well no one said there is a relationship between market cap and GDP. They said there is a relationship between market cap divided by GDP and stock performance

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nedsaid
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by nedsaid » Fri Jun 14, 2019 4:59 pm

I would say that the Buffett Indicator is useful, similar to my many comments about extremes in market valuation and sentiment. Buffett is onto something but I wouldn't look at any one indicator. I get the sense the market is expensive here but we don't see the extremes of market valuation or sentiment that we saw in 1999. Forward P/E's then were about 32, today they are about 18. No stories out there of people quitting their jobs in order to day trade stocks. The main takeaway from this is that this would be a good time to rebalance your portfolio if you haven't done so in a while. Also, if the Buffett indicator makes you nervous, take a little bit off the top. Better to panic near market tops rather than panic after the market has crashed. Another test would be to check the Berkshire-Hathaway annual report to see if Buffett is heeding his own warnings. My guess is that he hasn't done much of anything about this.
A fool and his money are good for business.

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SimpleGift
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by SimpleGift » Fri Jun 14, 2019 5:25 pm

urizaf wrote:
Fri Jun 14, 2019 4:07 pm
Is a Stocks/Bonds evaluation based on Buffet indicator logical?
The Buffett indicator (ratio of U.S. market cap to U.S. GDP) may have made some sense 50 years ago, when large U.S. companies were more domestically-oriented. But S&P 500 companies today generate nearly 40% of their revenues overseas. So it's illogical to expect a market with substantial foreign revenues to have any meaningful relationship to U.S. GDP anymore.

While this ratio may give a very rough sense of valuation, there's no way to determine a mean fair-value that would indicate whether the current ratio is too high or too low. It's certainly nowhere near precise enough to drive portfolio allocation, in my view.

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urizaf
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by urizaf » Fri Jun 14, 2019 5:32 pm

interesting. Thanks!

Ferdinand2014
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by Ferdinand2014 » Fri Jun 14, 2019 5:35 pm

urizaf wrote:
Fri Jun 14, 2019 4:07 pm
I have two questions regarding all the data I bring here:

1. Is a Stocks/Bonds evaluation based on Buffet indicator logical?
2. What percentage would you currently own of stocks and bonds at the moment??

Buffet indicator is :
percentage of total US market cap (TMC) relative to the U.S. GNP.

quoting:
https://www.gurufocus.com/stock-market-valuations.php

"As of 2019-06-14 (updates daily):
The Stock Market is Significantly Overvalued. Based on historical ratio of total market cap over GDP (currently at 140.7%), it is likely to return -1.9% a year from this level of valuation, including dividends. "

"the highest point was 148% during the tech bubble in 2000."


Additionally according to :
https://www.gurufocus.com/shiller-PE.php

"Shiller P/E: 29.8 ( %)
Shiller P/E is 75.3% higher than the historical mean of 17
Implied future annual return: -1.8%
Regular P/E: 21 (historical mean: 16.1)"
He makes no recommendation or use of this for the average investor in any Berkshire annual letter that I can recall. I have read every single one. He basically states that one should buy and hold over a period of years and it will all work out. He has related valuations of equities to sensible earning multiples to current interest rates.

“Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date. “Risk” is the possibility that this objective won’t be attained. I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates. It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.”- Warren Buffett 2017 Shareholder Letter

He essentially believes for the average U.S. investor, buy over time a low cost S&P 500 index fund, balanced by enough short term treasuries to sleep well at night. It is commonly believed he suggests 10%, but he is very clear that he suggests that number could be higher or lower depending on your comfort level.

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SeeMoe
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by SeeMoe » Sat Jun 15, 2019 9:00 pm

I go by age and it is serving me well over the years reducing the stock portion gradually until I’m only 40/58/2. The 2 being 2% prime money market in a flagship folio. John Bogle said to reduce stock holdings as one ages for safety. I’m 76 now. May eventually reduce the stock portion a tad more to 35% by age 80, gods willing. Of course we both have good pensions with benefits too, allowing the folio to grow reasonably well. Taking out funds only when needed for big ticket items.

Moe.. :beer
"By gnawing through a dike, even a Rat can destroy a nation ." {Edmund Burke}

UpperNwGuy
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by UpperNwGuy » Sat Jun 15, 2019 9:11 pm

Buffet is not the average investor nor an investment advisor. He's the head of a large company that buys other companies or significant stakes in other companies, something I will never be in a position to do. I would not take his advice on how to invest my limited assets.

Carol88888
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by Carol88888 » Mon Jun 17, 2019 12:25 am

If you don't take Buffett's advice you are comfortable rejecting the most successful investor of all time.

I think his general principles are very sound. He has said that "the dumb money ceases to be dumb money when it chooses to invest in a low cost index fund." Doesn't get more basic than that.

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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by UpperNwGuy » Mon Jun 17, 2019 1:45 am

Carol88888 wrote:
Mon Jun 17, 2019 12:25 am
If you don't take Buffett's advice you are comfortable rejecting the most successful investor of all time.

I think his general principles are very sound. He has said that "the dumb money ceases to be dumb money when it chooses to invest in a low cost index fund." Doesn't get more basic than that.
This thread isn’t about whether or not to use low cost index funds. It’s about the “Buffet Indicator.” I can assure you that Buffet uses such indicators to guide the timing of his billion dollar investments in ways that are not relevant to my $500 a month investments.

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JoMoney
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by JoMoney » Mon Jun 17, 2019 2:22 am

It's interesting to me that Buffett himself seems to dismiss this "Buffett Indicator" when he was asked directly about it
http://fortune.com/video/2014/10/07/buf ... easonable/
"... I did use it in a talk I gave, 15 years ago in Sun Valley, that got reprinted in Fortune, a standard of total market capitalization to GDP, and I used that because it showed at that time how extreme things had gotten ... it wasn't designed to be a fine-tuning valuation, but it showed things had really changed in a big way..."
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

magneto
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by magneto » Mon Jun 17, 2019 3:21 am

urizaf wrote:
Fri Jun 14, 2019 4:07 pm
I have two questions regarding all the data I bring here:
1. Is a Stocks/Bonds evaluation based on Buffet indicator logical?
2. What percentage would you currently own of stocks and bonds at the moment??

"Shiller P/E: 29.8 ( %)
Shiller P/E is 75.3% higher than the historical mean of 17
1. Probably, but then Stocks are expensive whichever way they are measured.
We don't necessarily need to look beyond CAPE with ever more convoluted thinking.
Stocks may not succumb this week, or next week, but expected returns over next decade or so are far from encouraging.
Sadly Bonds are equally expensive, so the two falling together as in the last secular bear market pre 82, remains a possibility.
Quite how all this might come to pass remains a puzzle.

2. Liquid Portfolio :-
25% Stocks/20% Bonds/55% Income generating Alternatives and Cash
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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urizaf
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by urizaf » Mon Jun 17, 2019 2:43 pm

magneto wrote:
Mon Jun 17, 2019 3:21 am


Sadly Bonds are equally expensive, so the two falling together as in the last secular bear market pre 82, remains a possibility.
Quite how all this might come to pass remains a puzzle.

2. Liquid Portfolio :-
25% Stocks/20% Bonds/55% Income generating Alternatives and Cash

The problem I have with your line of though, is that - since we don't know when the correction will happen, we shouldn't try to be timing the market. Therefore aren't you losing with the cash in your liquid portfolio? isn't a better option is buying the expensive bonds ?

magneto
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by magneto » Tue Jun 18, 2019 3:01 am

urizaf wrote:
Mon Jun 17, 2019 2:43 pm
magneto wrote:
Mon Jun 17, 2019 3:21 am


Sadly Bonds are equally expensive, so the two falling together as in the last secular bear market pre 82, remains a possibility.
Quite how all this might come to pass remains a puzzle.

2. Liquid Portfolio :-
25% Stocks/20% Bonds/55% Income generating Alternatives and Cash

The problem I have with your line of though, is that - since we don't know when the correction will happen, we shouldn't try to be timing the market. Therefore aren't you losing with the cash in your liquid portfolio? isn't a better option is buying the expensive bonds ?
The Alternatives plus Cash give a more than satisfactory income yield in aggregate for that portion of the liquid portfolio.
Bonds are split 50/50 conventional/inflation - there may be a case for taking a view and boosting inflation Bonds, or maybe not. Presently under review.

Timing the Market assumes some investor expectation of how markets are likely to move in the immediate future.
Valuation driven Variable Ratio Asset Allocation assumes no foreknowledge, is an essentially passive strategy, accepting proportionately what is on offer today, not actively looking ahead, significantly different but nevertheless frequently confused with Market Timing.
However we all tend to wonder about how reversion to mean over perhaps many decades may come to pass.

See in another thread you write about Ben Graham's 'The Intelligent Investor'. Some of his other writings are also thoughtful, such as those in 'The Rediscovered Benjamin Graham'.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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urizaf
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by urizaf » Tue Jun 18, 2019 3:16 am

What are these 55% Income generating Alternatives if I may ask?

magneto
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by magneto » Tue Jun 18, 2019 3:27 am

urizaf wrote:
Tue Jun 18, 2019 3:16 am
What are these 55% Income generating Alternatives if I may ask?
Real Estate (mostly REITs)
Commodities Income
Renewables
Infrastructure

This investor being based in UK, choices may differ from those under review.

N.B. some regard these Asset Classes as sub-sectors of Stocks, rather than separate Asset Classes, but perhaps the difference lies in the correlations ?
See also Meb Faber's 'Global Asset Allocations' for more thoughts on this subject.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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urizaf
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by urizaf » Tue Jun 18, 2019 3:33 am

Aren't commodities "not an investment" since they have no intrinsic value?

magneto
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Re: Stocks/Bond Allocation Based on Buffet Indicator?

Post by magneto » Tue Jun 18, 2019 8:27 am

urizaf wrote:
Tue Jun 18, 2019 3:33 am
Aren't commodities "not an investment" since they have no intrinsic value?
Commodities Income

While fretting about elevated valuations, not to forget that the Constant Ratio Asset Allocation favoured by most here, would mean holding a lesser number of shares at higher valuations, and the converse. So to some degree shifting of Assets is already taking place through the rebalancing process in response to valuations.
Whether to take matters a stage further with the Variable Ratio as per Ben Graham, remains the bone of contention.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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