Buffet indicator can help us tell where the market will move. It is a very popular tool for estimating market movements. Do you use it?
Let’s take a look at what a Warren Buffet indicator is and how it can help us understand the market.
What is Buffet indicator?
The Buffet indicator is used to assess whether the stock market is overvalued or undervalued, given the size of the economy. The calculation is the earnings of the combined market capitalization of a country’s publicly traded shares by its quarterly gross domestic product and is expressed as a percentage.
Since July 30, this indicator has risen from 170% to 183%, that’s a very high increase. This indicator has a very good history with regard to crisis forecasting. In fact, before 2008, it rose very sharply before the crisis. Although the indicator is not perfect, because it does not take into account some things (for example, overseas income and US-based companies may not necessarily be beneficial to the US economy).
The collapse can also be reversed, the US government and the Fed are taking steps to support the markets.
What if a crash occurs?
But there may also be a crash if the steps taken by the Fed and the US government will not be enough. How to prepare for such a situation? Simply, invest in something that will protect you from such a crisis so that you do not lose your money.
You can invest in gold or cryptocurrencies, for example. In these days the access to such investments is easy. Cryptocurrencies are a very good protection against inflation, and during this year’s market crash due to a pandemic, they have shown that they can recover very quickly to their original level and continue to grow, and their biggest advantage is that you own them.
Buffet indicator is very popular for its relative accuracy in crisis forecasting. However, if this growth, which we have seen since the end of July, can predict such a thing, we need to act and secure our money from devaluation. Just remember the golden rule of investment: invest only as much as you can afford to lose.