The Buffett Indicator and Its Role in Market Forecast

This Warrens a Buffet Indicator!

Warren Buffet is highly regarded as one of the most capable value investors. His insight and experience have armed him with the ability to develop his own financial metric, “The Buffet Indicator”. Used to measure the economy, it is the ratio of the stock market capitalisation of a country to its GDP.

The ideal value of this indicator is 1 because if every single economic activity was corporatized, the GDP would be numerically identical to the aggregate turnover of companies. A higher ratio hints at overvaluation meaning that a crash is imminent. As it just so happens, the Indicator is over 180% right now.

From increased listings to the pandemic-induced economic downturn, the reasons are plenty. Admittedly, this Indicator has its own share of flaws. And for India, the latest numbers are at 70% and has rarely gone upwards of 100%. Even though we witnessed a few remarkable milestones, the Indian market has quite a distance to traverse.

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