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😕 Buffett Indicator out of whack

April 15, 2021 Sign up
TOGETHER WITH Finny

The word Thursday is actually derived from the old English word Thor, which refers to the Germanic god of thunder. That guy definitely shorted Tesla last year. 

Here's what we cover today:

  • The Buffett Indicator is out of whack, and what that means
  • Is it worth it to move somewhere more affordable? The stats and our take
  • Reboot your budget through your receiptsYou read that right
  • How much savings is enough for my age? A way to think about it

And can you guess what Google search spiked 2,450% in the past month? Find the answer in the Trending section below.

INVESTING

The Buffett Indicator is out of whack

The Buffett Indicator is not an app that shows you all the nearest Golden Corrals in your local area (sorry, Texas). It’s actually an investing tool named after Warren Buffett, and while it makes sense that an investor with the resume of Buffett would have an indicator of his own, many people haven’t heard of it before.

So, what the heck is the Buffett Indicator?

The Buffett Indicator is a market data point that attempts to determine whether or not the aggregate market is valued properly. It’s actually called the market cap to GDP ratio, and has been attributed to Buffett due to his comment suggesting that it’s “probably the best single measure of where valuations stand at any given moment.”

As its origins suggest, the indicator is calculated by totaling up the market cap of all publicly traded companies in a given country, and dividing it by the nation’s gross domestic product. As you can probably surmise, the higher the aggregate market cap relative to GDP, the more overvalued a market potentially is, whereas the opposite rings true of an inverse scenario.

Okay, cool, but what makes it out of whack?

After last year’s flash crash, and even before then if you include the almost linear ten-year climb of the ratio, the Buffett Indicator has been seeing a lot of red. Essentially, according to this metric, the market as a whole is overvalued in a historic way. It’s recently gone so high Elon Musk is asking Cathie Woods for her opinion on it.

The indicator currently sits at about 200%, give or take considering fluctuations—an all-time high. How do we get this number?

We took the present market cap of all public companies and divided it by the country’s annualized (estimated) GDP based on 2021’s first-quarter production: $49.3T total market cap & GDP estimate of $21.8T. 49.3/21.8 = 2.26, or 226%, as of March 31st 2021. 

For some perspective on this, during the internet bubble the indicator topped out at about 67%, and during the bottom of the financial crisis, it was at about -48%. It’s been climbing, despite obvious fluctuations, ever since then.

This is what leads us to our assessment of “out of whack.” The market has been supposedly overvalued for so long, that it begs the question of whether the indicator is valid now. As with anything, the average shifts over time. Experts used to consider the average of 75% to be a good balance, but that’s shifted closer to a sentiment that 100% is a more relevant benchmark now, despite previously being considered a sign of an overvalued market.

The takeaway and things to consider

  • More companies going public results in a higher cap # 
  • We’re in the midst of a potentially over-extended recovery

No one knows when the next market crash is coming, and the Buffett Indicator is no exception. Historically it’s been a rare occurrence, with cyclic corrections and sector rotations being far more common. Interpret this reading accordingly—it shouldn’t stop you from investing.

💡 If you're looking for companies that Warren Buffett would invest in today, because of their strong economic moats and competitive advantages, take a look at Finnyvest's Buffett stock screener.

HOUSING

Is it worth it to move somewhere more affordable?

Changing locations is becoming more and more commonplace in America. People are no longer staying local and working a union job until they get a nice pension and retire. The dynamics of employment are changing, and so are our living situations.

Based on the reports we heard in 2020, you might’ve thought a biblical level exodus was taking place in California as reports of residents vacating the state for cheaper locations continued to spread. California actually netted about a 135,000 resident loss in 2020. So, maybe not quite as dramatic as the bunch Moses supposedly led out of Egypt. 

Is it really worth it though? Moving is a hassle, costs money, and let’s not forget often means a career change. Is moving your life to a cheaper location really worth the difference?

Comparing the cost of living in different locations

The cost of living index sets a base city rating of 100.  Below this would be considered cheaper than average, and above it, the opposite. Mississippi has the lowest COLI number of 2021, coming in at 86.1. Arkansas follows with an 86.9, Oklahoma at 87, and then 9 other states that sit below 90 such as Georgia, New Mexico, Wyoming—pretty much the places you’d expect.

The national average in 2021 is 104.63, but let’s consider the fact that we have two extreme outliers in California and Hawaii. California has a rating of 151.7, and Hawaii is at 192.9. In other words, there are a lot of places to choose from that are within the reasonable range.

Home prices

The median home valuation in Georgia is bout $176,000. In Illinois, it’s $194,000. Arizona is $225,000, Texas is $172,000, Montana $230,000, and Vermont $227,000. Noticing a pattern? They’re all within about the same $100,000 range. 

Out of all 50 states, 26 have a median average home price below $200,000. 15 fall between 200K and 300K, and only 9 above that. Of that 9, only 2 medians sit above $300K: California and Hawaii. They’re also extreme statistical outliers, sitting at $505K and 615K each.  

So, what does all this mean? That there's a lot of places to live for a reasonable price, and moving just because of the cost of living is only applicable to a few groups.

Questions to ask yourself

If you’re considering moving, it’s important to objectively analyze your situation. 

How will moving help me meet my short or long-term goals? How much am I paying to live where I do, and what am I getting in exchange for that? Could I obtain something comparable or even better somewhere else for a lesser cost? How will this impact my career, my family, or life as a whole? 

Our Take. There are plenty of good reasons to move that go well beyond financials. But it’s important to be honest about those reasons because most people won’t find themselves in a situation where they're paying an exponential cost of living comparable to the rest of the country.

PRESENTED BY FETCH REWARDS

Reboot your budget with your receipts

Let’s talk about receipts. You know, those slips of paper that usually end up crumpled in your pocket or purse, stuffed into your junk drawer, or worse—immediately tossed into the garbage. 

If you have the Fetch Rewards app, you’ll start seeing your receipts differently. Earn rewards for simply snapping pictures of your receipts.

Here’s how it works:

  • Download the app and take a photo of ANY receipt to start earning points. Every receipt counts, even those from online retailers (like Amazon!).
  • Redeem points for free gift cards. There are hundreds of options, including Visa, Amazon, Target, Starbucks, Ulta, and more!

Reboot your budget and money-saving goals with Fetch Rewards. It’s easily one of our favorite free apps of 2021!

Download the app and use code "FINNY" during signup and earn 3,000 bonus points for your first scanned receipt.

BUDGETING & SAVING

How much savings should I have for my age?

They say comparison is the thief of joy, but if that’s the case then it must also be the giver in some cases. Comparing yourself to others your age in terms of how good you are at saving money can either serve as validation or a motivator, but both are positives to financially woke people like yourself.

Fidelity recommends savers to stash away 3x their annual salary by the age of 40

So at a $50,000 salary, that’s $150,000 saved. A saver who starts at age 22 with that $50,000 salary would need to save a little over $8,000 per year in order to achieve this by 40. That comes out to a bit over 16% of your annual gross income. 

They also recommend that...

  • by 50, you should have 6 times your salary saved.
  • by 60, you should have 8 times your salary saved.
  • by 67, you should have 10 times your salary saved.

How should you prioritize your savings?

There are two types of saving that hold priority over everything else: retirement and emergency funds. They serve two different purposes, one is an insurance policy while the other is a full income replacement strategy, and everyone’s life has different needs.

Here are some general rules to apply that can help preserve your future:

  • Establish an emergency fund of 3-6 months of expenses first, as a safety net.
  • Put away 10-15% of your gross income at minimum for retirement planning, and more if you wish. The later you wait, the higher you’ll need to adjust to meet your retirement goals. 
  • Contribute to your company’s 401k, especially if they offer an employer match. It may seem like a small percentage, but that free money compounds over decades. 
  • Based on your income, consider also opening an IRA or Roth IRA. Go for an IRA if you plan to withdraw the funds at a later date when your tax bracket is lower, and consider a Roth if you predict your tax burden will be higher in the future than it is now.

🚀 Learn or refresh yourself on how to boost your retirement savings:

✨ TRENDING ON FINNY AND BEYOND

  • ‘When is the housing market going to crash?’ is the red-hot search on Google that spiked 2450% last month—here's why (CNBC)
  • Coinbase's public listing is a cryptocurrency coming-out party (New York Times)*
  • Have a personal finance question you want us to ask us or want us to cover in a future edition? Let us know!
  • Finny discussion post of the day. What would you tell your younger self about investing for retirement?

Finny is a personal finance education start-up offering free, game-based personalized financial education, a supportive discussion forum, and simple stock and fund tools (aka Finnyvest).  Our mission is to make learning about all things money fun and easy! 

The Gist is Finny's newsletter to our community members who are looking to make and save more money, protect their finances and be their own boss!  It's sent twice a week (Tues/Thurs). The editorial team: Austin Payne and Chihee Kim.

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