Warren Buffett’s sounding the alarm for investors, says Barefoot Investor
Donald Trump believes we are entering a ‘golden age’ of investment returns but legendary stock picker Warren Buffett is screaming ‘SELL’. So who’s Barefoot Investor backing?
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Strap yourself in … the Trump trade is on, and everything is going up.
The day after Donald won the election, the US stock market surged 1500 points – the biggest post-election gain in 128 years.
Even better, Trump says we should be preparing for a ‘golden age’ of investing returns as he slashes corporate taxes and loosens up those annoying rules and regulations for his billionaire buddies.
MAGA!
However, there’s another billionaire who’s been doing the exact opposite … he’s been selling down his holdings as share prices climb.
Even worse, that billionaire just so happens to be none other than Warren Buffett, the greatest investor in history.
What’s going on?
Well, Buffett famously doesn’t try to time the market, and he pokes fun at anyone who believes they can. However, he does have a valuation yardstick that lets him know when the market is out of whack.
It’s called the ‘Buffett Indicator’, and it takes the total capitalisation of US stocks and divides it by US gross domestic product (GDP). The idea being that if stock prices rise faster than the economy grows then it may be a sign of a bubble.
The Buffett Indicator flashes warning signs to investors when it surpasses 100 per cent.
As it did at the height of the Dot.Com bubble.
… and before the Global Financial Crisis.
… and at the beginning of the Covid crash.
So where is it sitting today?
208 per cent.
That’s the highest it’s ever been (“HUGGGE” in Donald Trump language).
In other words, the Buffett Indicator is screaming “SELL”.
And that’s what Buffett has been doing. He’s been stockpiling record amounts of cash, presumably to allow him to once again be “greedy when other people are fearful” (which is how you become one of the richest people on the planet).
Okay, so by now I’ve probably thoroughly confused you.
Which billionaire should you believe?
Well, I’m inclined to believe both of them … though I think Buffett will win out in the end, if for no other reason than he generally does.
Let me be clear: stocks could (and probably will) rise from here.
However, in the long run share prices always revert to their long-term averages, which means there’s a possibility that returns over the next 10 years are not as likely to be as good as those of the last decade.
Right now, few investors are thinking about what may be lurking around the corner.
Case in point: The share market is not only at record highs, but the latest US Consumer Confidence figures show that investors strongly believe that stocks will continue powering ahead. In fact, investors haven’t been this confident that stocks are a no-brainer since (checks notes) …
… since 1987, when stocks savagely plummeted 25 per cent in a single day.
Still, as I said a few weeks ago, history has proven that it doesn’t matter who is in the White House. What matters is that you hold through both the good ride (like today) and the inevitable crash.
Buckle up!
Tread your own path!
Stoned on Weed Stocks
Hi Scott,
Do you know what is happening with the medical cannabis companies? I had shares in AC8 and CGB and both have been delisted. Others are only worth 1/100th what I paid for them! Should I be freaking out?
Andrew
Hey Andrew,
Dude, it sounds like you’ve been well and truly smoked.
A few years ago it felt like everyone was getting high on cannabis stocks. I vividly remember a mate of mine – a comedian – trying super-hard to persuade me to have a toke on his favourite pot stock.
No joke!
Now I don’t doubt for one second that there’s a huge market for medicinal marijuana, as well as for plain old Mary Jane. Case in point: more Americans smoke dope each day than drink alcohol, according to data collected by the National Survey on Drug Use and Health.
Still, the reality is that traders blew up the valuations of these start-up businesses way too much. Now the market has come off its high, and there are a lot of marginal businesses that aren’t worth anything like the prices investors paid for them in the boom.
Should you be freaking out?
I think the time to freak out was a long time ago. I’ll leave the rest to you, Scooby-Doo.
HECS Debt is Bad Debt!
Scott,
I understand that HECS debts don’t attract a traditional interest rate, but mine goes up like 25 per cent a year, which is way worse. Also, I believe that there was a rule change and HECS debts now no longer die with us, which means our poor kids could be left with nothing.
Sarah
Hi Sarah
I’m taking it that you didn’t study statistics at uni … your HECS debt has not gone up by 25 per cent in a year!
HECS debt is designed to keep up with ‘today’s dollars’ by increasing the debt by whatever the Consumer Price Index (CPI) does each year. No one gave a toss about this until 2023, when a bout of high inflation increased HECS debts by a massive 7.1 per cent.
In response to that bill shock, HECS debts will soon be matched to whichever is lower out of the CPI or the Wage Price Index (WPI). And once legislation is passed it will be backdated, which would bring down the 7.1 per cent in 2023 to 3.2 per cent, and the 2024 rate of 4.7 per cent to 4 per cent.
The other thing to know is that the wage you need to earn before you start making repayments is increased every year, and there are plans to make the repayments more in line with marginal tax rates.
Finally, you do not have to pay off your entire debt when you cark it (and nor do your kids).
The executor of your will is required to file all tax returns up to your date of death. If your annual HECS repayment is owing, it’s paid from your estate. Any remaining HECS debt is then written off by the Government.
Social Media is the New Smoking
Scott,
Australia made global headlines this week after the Government moved forward with a plan to ban under-16s from accessing social media. I know you’ve been all for this, but, as a mother of three teenagers who are permanently attached to their phones, I wonder how practical it will be in the real world. Would love to hear your thoughts.
Zara
Hi Zara
It sounds like your kids are in the same leaky ship as many others – Mark Zuckerberg’s SS Algorithm – and it has well and truly sailed. And just like the rest of us aboard, they are doing unpaid, stressful, around-the-clock work for a billionaire.
Personally, I think these proposed laws will be about as successful as the age limit for drinking or smoking: the reality is that if kids want to drink or smoke they will. There’s always someone with a fake ID, or a loose parent who’ll buy booze for their underage kids.
This is how life happens.
Still, I think the Government should be congratulated for kicking big tech in the shins (though I draw the line at their ‘Misinformation and Disinformation Bill’, which seems a little too Orwellian).
As they say in the classics, “and so it has begun”:
Social media is the new smoking.
It’ll take a while to fully catch on, but, make no mistake, that is where we are heading. The problems that social media is causing young people are too big and too important to ignore. Eventually – and hopefully not too many years from now – we’ll collectively turn on them.
This is how life happens.
DISCLAIMER: Information and opinions provided in this column are general in nature and have been prepared for educational purposes only. Always seek personal financial advice tailored to your specific needs before making financial and investment decisions.
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