Zerodha CEO Nithin Kamath has advice for all those who are confused when to buy stocks: follow the Buffett Indicator. Now, what exactly is this? Read on to find out.
The ratio of the GDP to the US stock market market cap is known as the Buffett Indicator. But, the formula is made in a way that it may be used for any nation. Kamath wants you to use it, for instance, to decide when to buy stocks in India.
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If we want to calculate it for India, we need to divide the present market cap of the Indian stock market and divide it by the GDP and find out the percentage of it. If the percentage is between 75 and 90, it is considered that the market is fairly valued. Anything above 90 indicates that the market is overpriced and, when it goes below 75, it shows the market is undervalued. And, that’s the perfect time to buy stocks.
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The Zerodha CEO shared a chart along with his tweet that says: “To the people looking for stock tips, wait for the Blue zone and buy anything; stick to nifty constituents...Everything is cyclical."
According to the chart, the ratio for India's FY23 stands at 103%, which indicates that the market is now overvalued. The chart also demonstrates that the market remained materially undervalued in FY09, during the recession, and in FY20, during which the country was severely affected by the coronavirus epidemic. Since FY20, the market has remained overvalued.
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Despite the fact that the future cannot be anticipated, it is easy to look at historical data to see how the market has performed after periods of high and low value for the Buffett Indicator.
It is significant to emphasise that, of course, no single indicator can represent the entire market. The Buffett Indicator is criticised for not taking into account the condition of non-equity asset markets when used as a valuation indicator. When deciding how to distribute their portfolio, investors must actually take into account and examine a wide range of asset types, such as corporate bonds, real estate, and commodities.
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