Buffett Reloaded

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I posted the following on the Motley Fool HG Valutaion board, sort of an improvement on an earlier journal entry I had made. So I thought I’d put it here too, for posterity. It also gives me an excuse to try out the lj cut function. And reveal what a total geek I am, in case there was any confusion on that point.

Back in December 2001, Warren Buffett wrote an article for Fortune magazine, which was a followup to a November 1999 article about the valuation of the stock market (actually, it had a lot of good stuff in it, but overall market valuation is what I’m going to discuss here).


I looked up the articles on the Fortune website (had to get a subscription) to review what he had said, and see if I could see where we are today. One graph he made made a big impression on me, which was the Total Stock Market Cap as a percentage of GNP.

The charge showed the market spiking above the GNP in 1929, and in 1998-2000, a strong argument that we were in a “bubble”. The majority of the time, the market wandered around 70-90% of the GNP.

The web version of the article didn’t have the graph, but Buffett mentions several numbers in his 2001 article:

For me, the message of the 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 part of 2000– you are playing with fire. As you can see, the ratio was recently 133%.

Even so, that is a good-sized drop from when I was talking about the market in 1999. I ventured then that the American public should expect equity returns over the next decade or two (with dividends included and 2% inflation assumed) of perhaps 7%. That was a gross figure, not counting frictional costs, such as commissions and fees. Net, I thought returns might be 6%.

Today, stock market “hamburgers,” so to speak, are cheaper. The country’s economy has grown and stocks are lower, which means that investors are getting more for their money. I would expect now to see long-term returns run somewhat higher, in the neighborhood of 7% after costs. Not bad at all– that is, unless you’re still deriving your expectations from the 1990s.

So, without his actual chart, I know his ratios saw 200% in 1999/2000, and 133% around the time of the second article (Dec 2001). I couldn’t find GNP or Total Stock Market numbers anywhere, but I used GDP from www.econstats.com, and S&P500 numbers from the Fool Historical Quotes to get the following table:

GDP SP500 S&P % of GDP
1998 Q4 8953.8 1229.23 137%
1999 Q1 9066.6 1286.37 142%
1999 Q2 9174.1 1372.71 150%
1999 Q3 9313.5 1282.71 138%
1999 Q4 9519.5 1469.25 154%
2000 Q1 9629.4 1498.58 156%
2000 Q2 9822.8 1454.6 148%
2000 Q3 9862.1 1436.51 146%
2000 Q4 9953.6 1320.28 133%
2001 Q1 10024.8 1160.33 116%
2001 Q2 10088.2 1224.42 121%
2001 Q3 10096.2 1040.94 103%
2001 Q4 10193.9 1148.08 113%
2002 Q1 10329.3 1147.39 111%
2002 Q2 10428.3 990.64 95%
2002 Q3 10542 815.28 77%
2002 Q4 10623.7 879.82 83%
2003 Q1 10735.8 863.5 80%
2003 Q2 10846.7 974.5 90%
2003 Q3 11107 995.97 90%
2003 Q4 11246.3 1111.92 99%

I had to move a decimal point in the GDP to bring the percentages into the range that Buffett saw, but it’s hard to tell if my numbers are correlative to his. Around Dec 10, the percentage isn’t 130% as he says in his article, and none of the numbers in 1999/2000 hit 200%. So mine seem to be low.

His article was one of the major reasons why I pulled out of Index funds and threw myself totally into individual securities (a strategy that has worked very well for me). However, had I been tracking this ratio closely, I might have gone back somewhat into Index funds late in 2002, which also would have been a fine strategy.

I’d like to recreate WEB’s chart so I could continue to use his metric to see where we are from a overall valuation point. Does anyone have an idea where to get GNP and Total Stock Market Value info?