The Warren Indicator, Middle Class Hacks Part-3


We have split the series into two. One elucidates the basics of the stock market and the other explicitly deals with the wisdom of various legendary investors like Warren Buffet, Philip Fisher, Charlie Munger, etc.,

When to buy stocks?

We can buy stocks if it is below the intrinsic value. To put it simply we have buy a rupee for less than a rupee says 40 paise. Who would turn down an offer for getting a rupee at the cost of 40 paise? It’s like buy a land or gold worth Rs.30000 for Rs.15000.

This is all logically okay but when can you get such opportunities. That’s the question you have to answer. One such thing that helps to evaluate the same is popularly called as “The Warren Indicator”.

What is a Warren Indicator?

The warren indicator is the ratio of the market cap of all the stocks listed to the GDP of the country. It works on a simple logic that the market cannot grow larger than the country’s GDP. How is that even possible? The country as a whole is worth say 2.72 lakh crores USD while the listed 1600 companies is more than that. It screams that there’s something crazy going on ☺. Isn’t it glaringly obvious?

Why is Warren holding a lot of cash right now?

Now that we know what’s warren indicator we can explain why he’s holding a lot of cash. The warren indicator is over 1 in the US. So, that means the market is overvalued and it will correct itself. There are ways in which the market can correct itself, it can either have a soft cushion and decrease with grace or just crash down.

We now know that the market is going to correct itself but let’s assess whether it will come down with grace or crash.

1. Global pandemic which dampened the revenue of all the companies and its impact is non-removable for at least a year.

2. The high valuation of the market despite the slowdown in the GDP growth.

These two add up to form a deadly combination. The market will crash but as nobody can time the market it is thus hard to tell when it will happen but it will happen for sure. Warren waits for this exact opportunity, his company holds 130 billion dollars in cash to invest in companies that it finds cheap and with a competitive advantage or as he like to call “The Moat”.

What about India?

If people weren’t crazy, we wouldn’t be crazy rich -Charlie Munger.

The value of this indicator for India is around 0.8, this means that the market is currently correctly valued to nearly overvalued. This indicator has gone past 1 only once and that was during the 2008 depression. The market corrected itself as it goes above 0.8 in the past decade as India is an emerging country.

Unlike the other depression this time we have halted the economic activities and this impacted us in many ways but the market rallied around 30% from March 23rd and this is without any fundamental support. The valuations are crazy and super high despite a negative projection of GDP growth in this fiscal year.

To sum it up there will be a crash and that is the time where we can grab our opportunities where if your favorite stock is not below intrinsic value now but it will go below the same and can grant us a bargain buy.

The Forever Bull theory:

Anyone with a sane mind would immediately call this a scam. The RBI (Reserve Bank of India) or FED (Federal Reserve System) does pretty good work in terms of holding the market but how long can they do it? They can’t do it forever. If at all it’s possible we would have avoided various depressions in the past. They are indeed using creative tools to aid the market but that can’t stop the things that are yet to happen.

Hope this helps you.

Bella ciao,

Koushik Sundaram K


University of Berkshire Hathaway by Corey Wrenn and Daniel Pecaut.

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