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Warren Buffett's favorite indicator is at a dangerous level, but he just bought these stocks anyway

Brian Sozzi
·Editor-at-Large
·3 min read
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Warren Buffett's favorite stock market indicator is at a dangerously elevated level, but that isn't stopping the Oracle from Omaha from scooping up several high-profile stocks anew.

The seventh wealthiest person in the world started new positions in Verizon, Chevron, Marsh & McLennan and EW Scripps in the fourth quarter of 2020, according to a new 13-F filing with the SEC on Tuesday evening.

Of the fresh positions added to Berkshire's portfolio, Verizon is one of the larger bets as the telecom and digital media giant rolls out high-speed 5G technology. Buffett scooped up 147 million Verizon shares for $8.62 billion. (Verizon is the parent company of Yahoo Finance.) Buffett also boosted his stakes in pharma leaders AbbVie, Bristol Myers Squibb and Merck, Yahoo Finance's Julia LaRoche reported. He trimmed stakes in Wells Fargo and Apple, and exited positions in JPMorgan and PNC Financial.

To be sure, it's interesting to see Buffett so bullish on stocks right now even if he has a forever investment time horizon.

The “Buffett Indicator” as it’s called in Wall Street circles — which takes the Wilshire 5000 Index (viewed as the total stock market) and divides it by the annual U.S. GDP — is now at a record high amid the latest climb to records in the broader market. In doing the math, the Buffett Indicator stands at about 195.7% — up sharply from 175% or so when applying third quarter GDP data.

The figure is well above the 159.2% seen just before the dot-com bubble.

“The stock market is significantly overvalued according to the Buffett Indicator,” said researchers at GuruFocus. “Based on the historical ratio of total market cap over GDP (currently at 195.7%), it is likely to return -3.1% a year from this level of valuation, including dividends.”

August 30th 2020 - Warren Buffett celebrates his 90th birthday. He was born in Omaha, Nebraska on August 30th 1930. - File Photo by: zz/Dennis Van Tine/STAR MAX/IPx 2017 1/19/17 Warren Buffett at the premiere of
August 30th 2020 - Warren Buffett celebrates his 90th birthday. He was born in Omaha, Nebraska on August 30th 1930. - File Photo by: zz/Dennis Van Tine/STAR MAX/IPx 2017 1/19/17 Warren Buffett at the premiere of "Becoming Warren Buffett" held on January 19, 2017 in New York City. (NYC)

The Buffett Indicator rose to fame after a 2001 Fortune Magazine article written by Buffett and long-time Fortune writer and Buffett insider Carol Loomis.

“The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment,” explained Buffett in the article.

It really shouldn’t be a surprise to see the indicator as inflated as it is today.

Federal Reserve liquidity continues to run rampant and is fueling new record highs in the stock market. Meanwhile, the ongoing COVID-19 pandemic continues to depress economic output.

But Buffett seems bullish anyway. Given the current liquidity backdrop, who can blame him.

Get more insight on Buffett’s investing do’s and don’ts here.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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