“No consultant in the world is going to tell you just buy an S&P index fund and sit for the next 50 years”- Warren Buffett , Source.
Warren Buffett has stated in multiple interviews that most individuals are better off investing in a passive index fund like that of the S&P 500 Index.
I personally love stocks, economics and financial history but due to my increased role in the family business, I will have to settle with the good ol index. In this case, the SPDR S&P 500 ETF (SPY).
The Buffett Indicator
My initial plans were to dollar cost average into Berkshire Hathaway. But after realizing that it’s market cap is now above $400 billion (December 2016), I don’t really see more upside for the next 20+ years. I may be proven wrong but for now, I will pass. My next plan was to dollar cost average into the S&P Index. But something about investing at the top of bubbles (.com bubble, real estate bubbles) and then riding my whole portfolio through crisis situation doesn’t exactly sound like fun. I rather have my dry powder for when blood hits the street.
Enter the Warren Buffett indicator
What is the Warren Buffett indicator?
As pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.” (source)
It’s that simple!!!
So where do I find this information? Gurufocus has an amazing page with all the info.
My Strategy with the Buffett Indicator
My strategy with the Buffett indicator is quite simple. Start with $1,000 and begin to save and invest each quarter. I will be saving weekly and investing quarterly. But theres some rules.
Ratio: Total Market Cap / GDP
- If the ratio is less than 75% , I will invest 100% of that quarter’s cash & dividends
- If the ratio is between 75%-90%. I will invest 50% of that quarter’s cash & dividends
- If the ratio is higher than 90%. I will invest 25% of that quarter’s cash & dividends
The rules are simple. They are meant so I invest when the Buffett Indicator tells me the market is undervalued and buuild cash when the market is fairly valued or overvalued.