Warren Buffett and Robert Shiller should be familiar names to anyone with an active interest in the share-market. They are two of the most respected individuals on the planet when it comes to money matters, and each have varied yet complimentary views on what drives the overall share-market.
Therefore, the title of this article has an underlying power behind it. “Can Warren Buffett and Robert Shiller both be wrong at the same time” is really the same way of saying “These two people are legends of their field and worth watching closely”.
The reason these two men are exceptional
Robert Shiller’s CV includes being the Professor of Economics at Yale University and a Nobel Prize winner in Economics. More importantly, he is the man behind the Shiller P/E ratio – a complex and compelling share-market indicator.
The Shiller P/E ratio is known as the more stable and reliable cousin of the Price to Earnings ratio, and is a market valuation tool that has accurately predicted the bubbles of recent decades (including famously for the 1987 Crash and the GFC in 2007/08).
Shiller PE Ratio in Australia
Warren Buffett is the world’s 3rd richest man and better known for his ability to source businesses that have an understandable business model and long-term abilities to grow. He is quick to tell people he cannot predict the short-term direction of the market, however, underlying his strategy is an optimistic outlook for the overall economy and a strong consideration on its relationship with the share-market. In fact, it is the relationship between the share-market and the economy that has made him a fortune along with his “buy low, sell never” company philosophy. More specifically, Buffett has been documented on multiple occasions for his consideration of the Market Capitalisation of the overall share-market and its position relative to the nominal value of the overall economy. This is called the Market Cap to GNP ratio or the Market Cap to GDP ratio.
Market Cap to GDP Ratio in Australia
Utilising the favourite metrics of the smartest minds in a field would be seen by many to be a no-brainer. Going against it could be like ignoring the opinion of the world’s best heart surgeon when needing a heart transplant.
Yet fund flows continue to diminish and the average allocation to equities continues to remain well below historical norms in Australia. This is despite the Shiller PE being below historical norms and the Market Cap to GDP around historical norms.
Summary
It will take time before we know who will make the correct long-term judgement – the Shiller/Buffett duo or the average Australian – but it would seem unlikely to be the latter.
Note: This articles comes from the most popular and commented data from the Investing Times Asset Allocation Research document. This comprises nine of the most influential factors that determine share-market value (including the Shiller PE and Buffett Market Cap to GDP ratio), with a compelling track-record over a 25-year period in Australia.
If you wish to see the 9 metrics, please request a free trial below and we will forward it by email. This is a value-add with no obligation.
