Buffett's Favorite Valuation Metric Says

[Parsad]

Article on Market Cap versus GNP.  Cheers!

 

http://pragcap.com/buffetts-favorite-valuation-metric-says

[dcollon]

A side question for some of you.  When you are looking at GNP or GDP, do you use real GDP or not?

[Rabbitisrich]

The ratio should be apples to apples. Market caps are nominal, so nominal GNP is appropriate.

[dcollon]

Thanks Rabbitisrich for your answer.  I was speaking more generally though than just this calculation.

 

Sorry, my question should have been better worded. 

[matjone]

I've always been confused about this.  In the article that I read Buffett didn't really explain the reasoning behind using it other than that it had always been a good predictor of returns.  Wouldn't it depend on  the ratio of public to private profits?  And shouldn't it take into account how much leverage was used to create the profits?  Should there be an adjustment for the foreign earnings of publicly listed companies?

 

I figure Buffett is right as usual in using it but I never fully understood it.

[Mephistopheles]

I've always been confused about this.  In the article that I read Buffett didn't really explain the reasoning behind using it other than that it had always been a good predictor of returns.  Wouldn't it depend on  the ratio of public to private profits?  And shouldn't it take into account how much leverage was used to create the profits?  Should there be an adjustment for the foreign earnings of publicly listed companies?

 

I figure Buffett is right as usual in using it but I never fully understood it.

 

There doesn't need to be an adjustment for foreign earnings, because GNP, if I recall correctly, measures total goods and services produced by American businesses, both foreign and domestic. So that would account for foreign earnings. This is an appropriate measure because it accounts for worldwide production of publicly listed companies and therefore is a better indication of stock market valuation.

[Viking]

Buffett folded the partnership in the late 60's because stocks were grossly overpriced. The ratio today is higher than when Buffett wound down the partnership... so I do not follow the logic.

 

Stocks obviously are much cheaper today than in 2000. We will find out in the coming years if they get even cheaper (or not). My guess is the secular bear market is not done and we will all come to understand and appreciate FFH's portfolio positioning (once again)!