There was a front page
article in the Wall Street Journal this morning about “Mom and Pop” now
entering the stock market, after an absence since 2008. It seems that by the
time “Mom and Pop” enter the market, it’s at the top! I can’t say I completely
agree with this but it does reflect how fast the stock market has gone up this
year and the amount of new money being invested. According to Warren Buffett, a
simple way to look at the market is to measure the ratio of the aggregate value
of the stocks in the Wilshire 5000 to the U.S. GNP. If this ratio is under 100%
stocks seem priced to buy. If it is over 100% stocks are pricey and will likely
come down. According to this idea, back in 2009, when the ratio was 76%, it was
a time to buy. As of September 30th the ratio was 109%. Does this
mean that stocks are headed for a tumble?
There are many ways to look
at the stock market none of which has proven infallible. The market is based on
what a willing buyer will pay a willing seller. We all know the stock market
goes up and down and it is difficult to determine when it will do either. The
best way to address this issue is to have a diversified portfolio of stocks and
bonds that have a relatively low correlation to each other. As an investor you
do not want to be “chasing” yield, but to set your investments in accordance
with your risk tolerance. I am sure that Warren Buffett is not selling most of
his investments in fear of a downturn in stock values, but he may be limiting
new purchases until such time as he feels that there are better values.
Ed
