Warren Buffett: Biography, Quotes and Buffett Indicator

Bend It Like Buffett: You Can Invest Like the Best

Warren Buffett
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Who Is Warren Buffett?

Warren Buffett is one of the world's richest men, with a net worth of around $50 billion. His success is thanks to his long-time investing with the company he co-founded, Berkshire Hathaway. Warren Buffett's investing acumen is so well respected that people listen to anything he says. His actions and statements have the ability to move company stock prices. Changes in the stock market help the economy by adding liquidity and making it easier for corporations to grow, and by adding wealth for investors.

Buffett Indicator

The Warren Buffett indicator is total market capitalization divided by Gross Domestic Product (GDP). It measures all the prices of all public companies compared to the economic output of the United States. Stock prices are based on corporate earnings, which should rise and fall with the economy. 

The Buffett Indicator has averaged 119% over the last 20 years. That means stock prices perform about 20% better than the economy. In 1999 and early 2000, at the height of the NASDAQ bubble, it approached 200%. In 2015, it was 150%. That's a result of the stock asset bubble in 2013.  Stock prices rose 30% in just one year. By this indicator, the stock market is overvalued.

Buffett advised people to invest in stocks when the indicator is around 80%. When asked if he would invest in stocks at the 2015 valuation, he said he's guided more by movements in interest rates, which have been at historical lows since the Great Recession.

(Source: "Buffett Indicator Flares," WSJ, June 15, 2015. 

Buffett Quotes on the Economy

After Osama Bin Laden had been killed, Buffett said that it wouldn't have much effect on the economy. A far greater threat was any natural disaster, such as Hurricane Katrina and Japan's earthquake. That's because they caused more economic damage, thus raising insurance costs.

Buffett also gave good advice to profit from economic booms and busts. He said "Be fearful when others are greedy. Be greedy when others are fearful." And, most important, "It makes no sense to bet against America for long." 

The Story of Berkshire Hathaway

Buffett cofounded Berkshire Hathaway with his less famous partner, Charlie Munger. Berkshire initially was a textile company whose cash flow was used to buy other companies. Its first investments were See's Candy and GEICO Insurance. By the late 70s, Berkshire's stock price was $290 a share. Most companies would split their stock, but Berkshire never did. By 1982, it was worth $750 a share, rocketing to $8,000 a share by 1989, and reaching a peak of $80,000 a share in the 90s. Berkshire's success was based on the simple principles of Ben Graham and Buffett's insistence on knowing each company's management.

Buffett Follows the Investment Strategy of Ben Graham

Rejected by the Harvard Business School for "being too young," Buffett applied to Columbia where he was mentored by investment guru Ben Graham. He had written two books, Security Analysis, and The Intelligent Investor. Both books introduced new concepts to the world of stock investment, which at the time was seen as essentially gambling.

Graham showed investors how to reduce their risk by analyzing the intrinsic worth of a company. By so doing, investors could determine if the stock price fairly measured the company's value. He advocated buying a company's stock if it was a bargain.

More on Value Investing

This concept, known as value investing, seems pretty straightforward today. However, it tends to go out of favor during boom times, when investors favor growth investing. It's a strategy where companies are value based on how much they might grow in the next few years, or even months. Growth investing helped create the boom that led to the 2001 recession. Investors bid up the share price of Internet stocks that had no revenue, or value, merely based on how much they might grow.

Buffett follows value investing no matter what.

He only buys investments he understands. This consistency is a huge reason for his success. For more details, see Joshua Kennon's detailed biography of Warren Buffett here.