- Warren Buffett warned that the US stock market is becoming more like gambling than investing and that many assets are priced far above their intrinsic value.
- He said the Buffett Indicator reached 232%, a record-high level, while CAPE has remained above 40, similar to levels seen just before the dot-com bubble.
- The Motley Fool said overheating signals do not necessarily lead directly to a stock-market plunge and that a long-term holding strategy focused on companies with fair valuations and solid fundamentals remains important.
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Warren Buffett, the Berkshire Hathaway chairman known as the Oracle of Omaha, warned that the US stock market is becoming less about investing and more about gambling.
The Motley Fool reported on August 5 that Buffett sharply criticized what he described as excessive froth in financial markets at Berkshire Hathaway’s annual shareholder meeting this year.
Buffett likened the US stock market to “a church with a casino attached,” saying long-term value investing and short-term speculation have become mixed together.
“The casino has become too attractive to people,” Buffett said. “What we’re seeing now is not investment or even speculation, but gambling, and many assets are priced far above their intrinsic value.”
Measures of market heat are also flashing warning signs. The so-called Buffett Indicator, which divides the total market capitalization of US stocks by gross domestic product, has surged to 232%, marking a record-high level. Buffett previously warned that when the gauge nears 200%, it is “playing with fire.”
The Shiller cyclically adjusted price-to-earnings ratio, or CAPE, another gauge of whether US stocks are overvalued, has remained above 40 since May. A notable example of the measure staying above that threshold came just before the dot-com bubble in 2000.
Still, The Motley Fool said overheating signals do not necessarily mean a sharp stock-market decline is imminent. Rather than reacting to short-term price swings, it said, investors should stick to a long-term strategy of holding companies with fair valuations and solid fundamentals.
Go Jeong-sam, Hankyung.com reporter jsk@hankyung.com
