Market Cap to GDP Ratio (Buffett Indicator) - #18 MASTER INVESTOR - YouTube

Namaskar, My name is Mukul and welcome to

another video of master investor series of asset yogi.

Friends when we think about the stock market,

one question surely comes to our mind

Is it the right time to enter the stock market?

or to buy any share?

And the next question that comes to mind is that

How do we know If it's the right time or not?

Now, what's the correct time to buy anything?

First, you should have the money definitely.

Second, that thing should be cheap.

When we buy vegetables, how do we buy them?

We buy seasonal vegetables, cause they are always cheap.

vegetables or fruits.

For example, in winters apples get cheap.

In summers mangoes get cheap. So obviously,

The best time to buy mangoes is to buy them in summer.

And in winters eat apples. so when we talk about fruits and vegetables,

then we know what will be cheaper at certain time.

But how do we know in stock market that when it'll be cheap or expensive?

So to know this there is an indicator in the stock market which we call Buffett Indicator.

Warren Buffett has talked a lot about this indicator.

He uses this number a lot and it has been quoted

in a lot of newspapers and magazines.

By the help of this number we can get an idea that stock market

is expensive, expensive means it's over valued.

or is it undervalued? It's possible that in today's date stocks might be a lot cheaper.

So we'll carefully understand this indicator in this video.

And we'll see how it can help us to

know that stock market is cheap or expensive?

And we'll analyse India's situation in previous 10-15 years also,

how this indicator is applicable for India in today's situation,

how can Buffett indicator help us?

Is stock market cheap or expensive? So stay tuned till last.

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Before starting the video let me tell you that you'll get all the links for master investor series in description.

Besides this, how to start in stock market? where to open Dmat and trading account?

You'll get those links in description also.

Let's first understand what is this Buffett Indicator?

Let's look at the formula. Total market cap divided by GDP.

Now what is total market cap?

In any country, whatever stocks or companies are listed on stock exchange,

total value of all those companies is called total market cap.

How is total market cap calculated?

What will be the value of the company?

Whatever the share price of the company is, multiply it by total shares,

You'll get total market capitalization, which will be the company's total value.

You got one company's total value. In the same way, assume

in a country there are 3000 shares or companies are listed.

So you'll add each company's market cap.

So you'll get the total market capitalization of any country.

If you divide that total market cap by the GDP, means the gross domestic product,

of the country then you get the value of the Buffet indicator.

We multiply it by 100 cause we see it in percentage terms.

We all know what GDP is, that is gross domestic product.

means how much production happened in a country?

Means how much total sales happened?

Whatever products and services were made in the country

in one year, we call that GDP.

So in Buffet indicator we have to divide total market cap by GDP.

And we have to see what number we get, and we multiply it by 100,

That becomes our buffett Indicator.

Now let's understand what this Buffett indicator shows us.

It is showing us a relative value.

That all the companies listed on today's date, their value

How much was it in comparison to total production?

We can understand by an example. Let's assume when you're evaluating a stock,

so we calculate a lot of ratios, like price earnings ratio, price to book ratio

we also calculate price to sales ratio as well.

that the sales the company made, the total revenue from that

In comparison to that, how much is the value of the stock?

And how do we calculate the price to sales ratio?

What's the share price of the company on today's date?

multiplied by number of shares, means we got total market cap.

Total value of company, divided by

total sales means how much revenue did the company earn that year, by that we

get a value of price to sales.

And if we say price to sales is more than one,

then maybe the company is a bit overvlued.

and if it's less than one, then it is bit undervalued.

Here we are talking about one, if we multiply by 100 then,

so if price to sales is greater than 100%

then the company is overvalued

and if it's less than 100%, then the company is undervalued.

This is not the only number we have to analyze.

But similarly here we were talking about one stock.

but if we want to know about the whole stock market

is overvalued or undervalued,

how will we know that?

It's the same. Add the value of all the companies,

divided by adding the total sales.

total sales are a little difficult to calculate but GDP is easy,

you get it very easily, that's why we

divide total market cap by GDP and we get a value.

and how do we analyze this value?

If the value of the Buffet indicator is more than 100, that means

maybe the stock market is in overvalued zone

and if the value is less than 100, then we call it an undervalued stock market.

And this value is done for the US market

the average value of 100.

This value of 100 is taken as the historical average.

of last 20-25 or 30-35 years.

So sometimes we are giving more money for the stocks, which means

stocks become overvalued which we call overvalued market.

so we get to know that by this indicator.

and similarly if the stock value is very less,

or they have fallen a lot, we also know that by this indicator.

We talked about USA which is a developed economy,

most of the companies are listed there, we we get a fair idea.

But if we talk about India, should we take the average value as 100?

to do our analysis?

No, If we take it as 100, we won't get a fair picture.

The average for India has been 75,

means it was 75%.

And why has this happened?

A lot of trading is in unorganised sector here.

Agriculter sector is very unorganized.

Now this unorganised sector is not reflected in listed companies,

that's why the historical average of buffet indicator

has been seen at level of 75.

So what will we say? If the value of buffet indicator is more than 75,

that means the stock market is a little overvalued.

And if it comes a lot below 75, then we'll say,

the stock market is undervalued.

Now we'll see the numbers in last 10-15 years on the graph

and when market was overvalued and when undervalued?

So here I have plotted the data of 16 years.

FY means from the financial year 2004

to the financial year 2020, data I have plotted.

And what number am I seeing here? market cap to GDP ratio,

which we call buffet indicator.

and see in 2004 this value was 42,

means stocks were very undervalued here.

and value increased slowly. You can see I've marked

it with green colour,

That has been the aberage value of India of 75,

of last 16 years, we could have taken more than 16 years.

I have considered 16 years. The average has been of 75.

And this value in Dec 2007,

it was 149, that means,

total market cap was 149%, which means

all the stocks market cap, in companrison of GDP

were 149%, so it was very overvalued.

If we're taking 75% average value so it was almost double.

So whatever the average price of the whole stock market should be

people were ready to give double money of that.

Like we talked about seasonal vegetables before, if mangoes

you had to buy at a double price even in the season that you'll definitely be pinched.

You'd want a fair price for that.

So whenever markets are this much overvalued,

then there is always a trigger that the market comes down for sure.

So here markets started to correct after reaching 149.

and after that, there was the Lehman Brothers crisis

The subprime crisis was there. Because of USA in whole world

the markets which were overvalued, they got undervalued after.

In FY 09, you can see in that

the value of 149 at DEC 2007 crashed down at 55.

So if we're taking average as 75 and when,

So when the values came much below that on 55,

so definitely stocks were very below historical average.

So the stocks were very cheap if we talk about Feb-Mar 2009.

If you study about it, you'll find stocks were very cheap then.

So similarly you can study data of financial years.

Now let's talk about the situation of the current date,

In today's date, this value is 58,

the ratio of market cap to GDP is 58, which means

stocks are a little undervalued.

Here you can see in FY 2018 or you can study last 3-4 years

that the ratio was 80 and above, means stocks were a bit overvalued,

in last 3-4 years.

Which have been corrected in the most parts.

Let's talk about what other things we need to look at.

So we saw that buffet indicator suggests that stocks are a bit undervalued in today's date.

But the question arises, if it is suggesting this, then should we jump in the stock market now?

Should we start buying stocks?

This is an indicator that you can definitely study.

You can also see other indicators apart from this.

And surely see the fundamentals of any stock.

For example, I'll tell a limitaion of buffet indicator.

This is only seeing price to sales, that means

we got price in total market cap, that what is price of total market?

divided by GDP where we got sales.

But we can't know only by sales if markets are undervalued or overvalued,

because we aren't seeing the profits here.

We are seeing total sales, profitability is not visible,

because we'll see other ratios, for example,

if we have to analyse a stock we see it's price to earning ratio,

we also see the price to book ratio. Similarly,

If you want to study the whole market, you should see other indicators as well.

So what other factors can we study?

If you want to know about it, if you want me to do a video on recession,

Do tell me in the comments.

If you liked this video then do like and share it with your friends and family.

It's possible that you get a lot of opportunities.

It's possible that markets go down more.

So it's not like you're getting opportunities only now.

and you won't get it in the upcoming time.

Because of CORONA, how much will the situation worsen, we'll know that only with time.

But definitely, if the stocks are undervalued today, then

the opportunity to buy stocks has started.

You can buy today also. Situation

can be of slowdown, so you'll definitely get opportunities,

in upcoming time also.

How was this video, do tell me in the comments.

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Till then keep learning, keep earning, and as always, be happy.