Buffett’s Favorite Metric Roars Sell!

You don’t get to be the richest investor of all time without having a few tricks up your sleeve. And one of those tricks is knowing when to buy and when to sell. Sure, Warren Buffett will declare on financial news networks that he is no good at timing the stock market. Yet somehow he timed the market almost perfectly during the last Great Recession to make his biggest bets in years. Billions were invested in Goldman Sachs and General Electric within just a few weeks. So, how did Buffett know the timing was just right to buy?

One clue is found in a little-known metric that has become known as the Warren Buffett Indicator. It is a simple ratio that sums the total market capitalization of all stocks and divides it by GDP.

In a rational world, Buffett concludes, the two numbers should be identical. So, when the market cap of all stocks is well below the economic output, the stock market is probably undervalued. And vice versa, the stock market is likely overvalued when the total market cap of all companies is greater than GDP.

As of August, 2018, the Buffett Indicator flashed warning signals to anyone paying attention to it. The ratio eclipsed levels it reached during the tech bubble to nearly 149%, a number never before reached in history. In short, the Buffett indicator is screaming Sell, Sell, Sell!

But before panicking out of stocks and selling all your holdings, you should know where you are going to deploy cash reserves. One interesting stock to watch these days is not a U.S.-based company at all. In fact, the company may never operate in the U.S. period, yet it has over one billion subscribers.

Which company fits the bill? China Mobile [CHL] is a telecoms company that pretty much owns the Chinese market for local, long distance, and domestic calls among various other services. Amazingly, it has more subscribers than people in China, inferring the saturation rate is above 100% – some people have more than one account!

What makes China Mobile [CHL] attractive these days is certainly not its technical trend, which would send shivers up the spine of any technical analyst worth their salt. No, the compelling case for the company is its dividend that is becoming ever more attractive, sitting at 4.50% at the time this article was written.

Now keep in mind revenues and profits have been steadily rising during the time the China Mobile share price has been falling in recent years. Eventually, bargain hunters cotton on to the value opportunity.

While most traders view the China Mobile stock chart from a rear-view mirror perspective only, fundamental analysts like Buffett earn their stripes by taking the plunge to buy when sentiment is against them.

As the Oracle of Omaha likes to say “better be fearful when others are greedy and greedy when others are fearful.” It’s hard to stand in the way of a freight train bearing down against you in the form of a falling share price but sometimes the greatest returns come from taking the greatest risk.