Many investors, novice and seasoned, look to Warren Buffett as a great example of how investing should be done. His principle of buying large companies with a wide economic moat at high valuations still works for the average investor, according to Brian Sozzi at Yahoo Finance.
This has been pointed out by Morningstar CEO Kunal Kapoor, despite the tempting get-rich-quick trades.
“Yeah, I think so,” Kapoor told Yahoo Finance when asked if investing as the “Oracle of Omaha” still works in today’s high-speed trading world. “History has shown that when a lot of people say it doesn’t work, that’s exactly when you want to do it again.”
Those inclined to follow the deep value-focused approach of the Berkshire Hathaway chairman tend to pay attention to his favorite measure of stock market valuation: the “Buffett Gauge,” as legions of devotees call it, which takes the Wilshire 5000 Index. (viewed as the total value of the stock market) and divide it by annual US GDP.
The Buffett indicator rose to fame after the billionaire wrote about it in a 2001 Fortune magazine article with Carol Loomis, a longtime Fortune writer and Buffett insider.
“The relationship has certain limitations in telling him what he needs to know,” Buffett explained in the article. “Still, it’s probably the best single measure of where valuations are at any given time.”
Lately, that gauge has been showing signs that stocks aren’t cheap enough to go all-in yet. It continues to hover around its late-2021 highs, even as 2022 has been terrible for markets amid rising interest rates and slowing economic growth.
Looking at the numbers, the Buffett Indicator stands at around 149.7%, according to data from GuruFocus. That is well below the all-time highs above 202% in August 2021, though still well above the levels seen during the COVID-19 recession in 2020 and the economic downturn of 2008-2009.
“The stock market is significantly overvalued according to the Buffett Indicator,” the GuruFocus researchers wrote. “Based on the historical ratio of total market capitalization to GDP (currently at 149.7%), it is likely to return 2.3% per year from this valuation level, including dividends.”
Consequently, Morningstar’s Kapoor believes that being patient right now is key for investors, as finding good prices to buy a share of a business is important for long-term returns.
“If you can get those deals at the right price and keep these businesses for long periods of time, your capital tends to build up because they’re great deals and they do a good job with capital allocation,” Kapoor added. “A buy-and-hold strategy tends to work quite well over time.”