The US stock market is overvalued by more than 170% because of speculators.

The American stock market is far from the real economy. Again. The last time was in 2008, before the crisis. And the previous one, in 2000, before the crisis.

What I am going to tell you here seems complicated, but it is not.

Warren Buffet’s indicator is nothing more than a division between two things. At the top is the total capitalization of the stock market and at the bottom is the country’s GDP. The total capitalization of the stock market is the number of shares outstanding by their prices, or in other words, the value of the U.S. stock market.

This indicator tries to give an approximate view of the difference between the value of what they produce and the value of the shares of these companies. The value of what they produce depends on the performance of the real economy, while the value of the shares depends on the state of the finances.

The current situation is worrying, because the indicator points to an overvaluation of shares by 170%, that is, finance has moved away from the real economy for a long time.

This indicator has been able to predict previous economic crises such as the internet bubble in 2000 or the economic crisis of 2008. The same episodes are repeated and everything indicates that we are about to enter a major economic disruption.

Warren Buffet is one of the richest men in the world and right now he has his money set aside; I don’t know how many millions of dollars waiting in his (figurative) safe until he finds a place to invest. For him, the stock market is in a speculative spiral that raises stock prices above what they are actually worth. At some point prices will fall and people will lose all their money.

Stocks can’t go up forever.

Many are making the mistake of getting carried away by the general euphoria.
They had withdrawn their money because they thought, like Buffet, that they were overvalued. But they’ve been going up for so long that many of these small investors are going back into the market buying at much higher prices, not realizing that they’re the ones who are going to lose the money.

When the bubble is about to burst, the big funds will exit the market (they will probably be the ones who burst the bubble by withdrawing their money) and the small investors will be trapped.

When the big fish stop playing, the game is no longer attractive and the small fish, who had invested their savings to be able to participate, are left with toys that are now worthless.

Warren Buffet talks a lot about this kind of performance. It seems that most people don’t invest, but rather speculate with the stocks.

Investing is having a long-term strategy to support a company’s projects.

To speculate is to buy shares because the rest of the people believe that this company is good and its price is going to increase.

To invest is to trust a company in spite of the bumps that may arise in the short term.

To speculate is to run away as soon as something goes wrong.

The investor is a person who thinks independently and who is not afraid to go against the tide if he finds sufficient reasons to do so.

The speculator gets cold feet because his thinking is not very well defined. He thinks like a sheep and follows the rest of the flock wherever they go, often without realizing it.

At a time like this, speculators lose all their money and die of stress, because they don’t know how to independently gauge the state of the market and the stocks. Society continuously sends contradictory messages that drive them crazy. They don’t know who to follow.

The investor is calm because the fundamental principles on which he acts do not depend on the economic situation. He will lose money, but he knows his limits and does not blame himself excessively. This also happens when he makes money, he does not get overly excited and acts with the greatest reserve.

Warren Buffet is probably the most successful investor in history and yet people still believe that they can outsmart him. They are almost always wrong, but time goes by and people forget. The indicator that bears his name is a warning that finances are disconnected from reality. No one seems to listen to him, they still believe they can profit from the next stock market rally.

Until that rise is a fall, and we all lose.

Daniel Alonso Viña
27.11.2020