Why the Buffet Stock Market Valuation Indicator is Wrong?

This paper shows that the Warren Buffet Indicator (BI) about stock market valuation, measured as the overall stock market value divided by GDP, contains an upward bias and not a proper indicator for three main reasons. Primarily, over 40% of the S&P companies’ earnings is overseas, which makes the US GDP to be not relevant. The second and third are the raise of high volume of IPOs companies and the turning of K-shape economy; both reasons shifts the balance between public vs private companies. For example, the Uber IPO add new business (transportation) to the stock market cap; was not before. Another example, if Apple the largest company decided to be private, then the Buffet Indicator will show that the market is undervalue. Thus, the BI turn to be a trend and since 2013, the BI is higher than the 2000 valuation. Possibly, the BI measures the fraction of the US GDP produced public companies. Instead, we offer the Bonaparte Valuation Indicator (BVI), which is measured as the current price earnings ratio divided by the forward GDP. It is imperative the forward looking to be included, since stock market is several quarters ahead. Altogether, despite the simplicity of the Buffet Indicator, it is no longer can play a role of this dynamic financial market, instead we offer the Bonaparte Indicator that accounts for earnings with forward looking