Warren Buffett made a name for himself and became a multi-billionaire by making some savvy moves in the stock market. So, it might surprise some folks to hear him say that for stock market investors, the most important metric to watch is found in the bond market.
“Everything in valuation gets back to interest rates,” Buffett said to Yahoo Finance’s Andy Serwer in April.
Recently, Buffett has been fielding a lot of questions about stock market valuations and how one should value individual businesses. And repeatedly, Buffett responded by pointing to interest rates.
It’s not as simple as CAPE or market cap to GDP
At Berkshire Hathaway’s recent annual shareholders meeting, an investor asked Buffett about the relevance of two popular measures of stock market value: 1) market cap-to-GDP, which Buffett once heralded as “probably the best single measure of where valuations stand at any given moment” and 2) the cyclically-adjusted price-earnings ratio (CAPE), which was made famous by Nobel prize winner Robert Shiller and was seen as accurately predicting the dot-com bubble and the housing bubble.
“Every number has some degree of meaning,” Buffett said. “It means more sometimes than others. … And both of the things that you mentioned get bandied around a lot. It’s not that they’re unimportant. … They can be very important. Sometimes they can be almost totally unimportant. It’s just not quite as simple as having one or two formulas and then saying the market is undervalued or overvalued.”