Problems and Limitations with the Buffett Valuation Metric

I liked this post over at Monevator discussing the limitations of the Buffett Valuation metric – Market Cap vs GNP.  Like most valuation metrics, the Buffett metric is a guidepost and not a holy grail.  I use it mainly for broad perspective, but that doesn’t mean it doesn’t have its limitations.  For instance, the metric has to have an upward bias to some degree because market cap is likely to grow faster than GNP for various reasons.  But there are other limitations noted in the post:

  • Little UK data for the stock market to GDP/GNP
  • Different countries have very different markets
  • What about overseas sales?
  • The ratio is often elevated, and thus arguably useless

There are some good comments as well.  Check it out.

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Geoff

    From those of us who have been dubious of this indicator from the beginning, thank you very much.

  • John

    Watching WB speak on YouTube the other day, he said that he and Charlie pay zero attention to macro, no interest in it all…basically what he said……..

  • Ilya

    This time it’s different. All I need to say

  • Hoffa

    Guess one would have To great each country different, cross-ownership, like in Japan, would justify a higher ratio.