This stock of stock suggests that investors can “play fire”. Do you need to worry about right now?
As he is currently suffering on the bull market, now in their third year, some investors start to worry about the tide turning. According to the latest weekly research by the American Association of individual investors, a whopping 60% of American investors feels the bear because of the future of the market – which has been the highest number in the last 12 months.
No one can say when the next fall will start, but there is one metric metric investors who may want to watch. Here’s what history says about such times and how to prepare its portfolio accordingly.
“Buffett indicator”, popularized by investor Warren Buffett, examines the ratio between the total number cap American shares i Gross domestic product (GDP). 2001, year, Wealth He published an article based on Buffett’s prediction two years earlier that the stock market was on the verge of a serious fall. He predicted this with the help of Buffett’s indicator, explaining that when that ratio became too high, it could signal that the market decline was ahead.
“If a percentage relationship falls to an area of 70% or 80%, the purchase of shares is likely to function well for you,” he explains. “If the ratio approaches 200% – as it did in 1999 and part of 2000 – you play fire.”
Since February 2025, Buffett indicator is sitting just over 205%. The last time that figure approached 200% was in November 2021, when it reached 193% – and shortly thereafter, in January 2022. The market went down to the bear market.
To be clear, no shares indicators are completely accurate, and the Buffett indicator also has its disadvantages.
For example, corporations and economic conditions have changed drastically in the last few decades, mainly because of technological progress. Companies, in general, have much greater estimates than decades ago, so older metrics, such as Buffett indicators, may not be so accurate in determining whether the shares are overrated or underestimated.
Case: Buffett indicator has not fallen below 100% of April 2013, suggesting that the supplies have been overrated in the last 12 years. Still, at that time, S & P 500 (Snpindex: ^GSPC) From this writing it grew by 281%. If you had stopped investing because this metric implied that it was not an ideal time to buy shares, you would have missed serious gains.
Also, using past market performance to predict future yields is always risky. Shares can be unpredictable sometimes, and even Warren Buffett himself cannot say where the market will be in a few months or a year. Even the most toughest market indicators can still be wrong, and when it comes to your financial future, it is wise to avoid too much reliance on any individual metric.
