How to Predict a Stock Market Crash: Warren Buffett

• Warren Buffett, one of the greatest investors of all time always gives more reliable advice about investments. Warren Buffett, he’s not known as a guy for timing the market. But one indicator that he does look at to see where stocks stand is the Market Cap to Total GDP. It’s now been named the Buffett Indicator because he is the one who made it so famous.

• He said,  back in the day that this indicator is probably the best single measure of where valuations stand at any given moment. The first part of the equation is Market Cap.
• What this is saying is how much a stock selling for. This gives us a good look at the stock market as a whole. The next part of the equation is Total GDP. GDP stands for Gross Domestic Product. How much is the world producing? How well is the economy going?
• If we take a look at the Buffett Indicator for the USA now, it stands over 180%. That means that stocks are now overvalued compared to what they are producing. The number over 100 means that the is priced higher than what the economy is producing. Stocks are businesses that produce. They make up the economy. The prices of the stocks should value less than what these businesses produce for the economy, the GDP. This shows us the higher prices of the stocks.
• Anything above 134% is considered to be significantly overvalued.

“When the indicator hit a record high in the months before the dotcom crash, it should have been a very strong warning signal”

Warren Buffett

• So, we have surpassed that stage now, this indicator becomes a warning signal to all investors. Look at the stock market. Most stocks are overvalued. The S&P 500 sits over 5000 level all-time-high. Stock prices are getting higher & higher. It’s not a good sign for investors & sometimes it may be a warning signal for a market crash. The market has been growing since 2009 after the housing bubble, almost 14 years.