Warren Buffett Off His “A” Game, New Strategies Needed

Warren Buffett Off His “A” Game, New Strategies Needed

$DIA, $SPY, $QQQ, $VXX, $IBM

Warren Buffett has been off his “A” game over the past couple years. It is too early to say how his most recent large acquisition Precision Castparts will end up performing. But his last major stock market buy – IBM (IBM) has been such a lame performer.

Nevertheless, Mr. Buffett is still a living legend, and his market calls have usually been good.

He has valuation tool he called “probably the best single measure of where valuations stand at any given moment.”

And that would be the ratio of total market cap to US GDP. Data site GuruFocus tracks the data back toY  1970 using the Wishire 5000 as a proxy for the “total” market cap.

The Big Q: How’s it looking these days?

The Big A: US stocks are valued at 118% of GDP. That’s down from the highs earlier this year of 125% and down from the 148% we saw during the 1990’s tech bubble. But it remains very expensive. The ratio would have to drop by another 8% just to get back to the levels of Y 2007, before the Y 2008 crisis began.

The market is not cheap, meaning non-sterling returns for the next several years.

Investment returns are a product of 3 factors, as follows:

1. Dividend yield
2. Economic growth, and
3. Change in valuation.

None of the three look great in here. Market dividend yields are 2%, and GDP growth is uninspiring. A 2% dividend and 2% – 3% economic growth would get us to 4% – 5% stock returns.

Now to valuation.

Assuming that the market returns to its long-term average market-cap-to-GDP ratio, we are looking at lean years ahead. GuruFocus crunched the numbers, and based on current valuations the market should return just 0.5% per year over the next 8 years.

A lot can happen in 8 years. But the odds are not in favor right now for buy-and-hold investors.

If people want to earn a respectable return over the next several years, they are going to need to be a lot more active and consider strategies not considered before.

The US market indexes finished Friday at: DJIA +74.22 at 17215.97, NAS 100 +16.59 at 4886.69, S&P 100 +9.24 at 2033.10

Volume: More than 900-M/shares changed hands on the NYSE floor with options expiration boosting the final tally.

• NAS 100 +3.2% YTD
• S&P 500 -1.3% YTD
• DJIA -3.4% YTD
• Russell 2000 -3.6% YTD

Have a terrific weekend.

HeffX-LTN

Paul

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