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Why does Warren Buffett believe the stock market is overvalued?

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Warren Buffett has gone on record as saying that investors must look at (a) corporate profits to GDP, (b) interest rates, and (c) market capitalization to GDP, to understand appropriate market valuation and prospects for return. Yet over the last five years (2012-2017), (a) corporate profits / GDP has dropped 10%, (b) interest rates (prime interest rate, FFR) have increased 1%, and (c) market cap has increased from 126% to 174% of GDP. In fact, market cap at 174% of GDP is close to its all-time high of 181% set in Q1 2000. (All of these numbers courtesy of the Federal Reserve, as of Q1 2017 but the anticipated 10% YoY profit increase for Q2 2017 will not change the results as Q1 2016 wasn’t very good.)

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Posted by DeltaV (Questions: 2, Responses: 7)
Posted on 08/16/2017 11:26 AM
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The equity market is rich by almost any metric. It doesn’t necessarily mean returns will be negative going forward. But it does very likely mean they will be lower than they have been.

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Cullen Roche Posted by Cullen Roche (Questions: 10, Responses: 1749)
Answered on 08/23/2017 12:17 PM
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    Agreed on all points.

    I also recently saw this article on Warren Buffett, titled “Buffett Says Stocks Are ‘Less Attractive’ But Still Beat Bonds” (https://www.bloomberg.com/news/articles/2017-08-30/buffett-says-stocks-are-less-attractive-but-still-beat-bonds).

    But when I read the article, the facts were incontrovertible:
    Buffett prefers stocks to bonds. But (for now) he prefers cash to stocks. Which only tells us that a value-based investor has a hard time reconciling the prices with the discounted cash flows. Oncor being a good example.

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    Posted by DeltaV (Questions: 2, Responses: 7)
    Answered on 09/01/2017 1:53 AM
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