Lessons from an Investment Giant

This week, I was contacted by a client who wondered if we could use the Buffett Index to predict market crashes and the optimum time to invest. 

It was a sensible question. 

Warren Buffett is regarded as the world’s most successful investor. 

Since there is an index named after him, it's logical to wonder whether it could be used to determine the most advantageous time to invest. 

Relying solely on the Buffett Index, or any single metric for that matter, can be misleading. Predictions are just that, predictions, and at times investment decisions are far from predictable.

Market insight or investment trap?

The Buffett Index measures the GDP of any country against its stock market value with a score of 100 suggesting a balanced market. 

Anything above 100 suggests that the market is overvalued and anything below 100, suggests the market is undervalued. 

It’s tempting to rely on a tool to time investments, but indexes are not crystal balls and are rife with limitations. 

The first issue with the Buffett Index is that it does not account for the global nature of the stock market. Take the UK for example, where 80% of the revenue generated by UK companies comes from overseas. Therefore, comparing the UK stock market to the UK economy doesn't give us the full picture.

The second limitation of the index is that it doesn't account for cyclical variations in market performance, such as periods of low interest, which tend to stimulate stock market growth. 

The biggest issue, however, is that stock markets can spend years overvalued by any measure and years undervalued. 

Whilst the Buffett Index can offer you a picture of the general temperature of the market, it doesn't tell you in any meaningful way what the market might do next. 

The danger of following things like the Buffett Index is that you end up relying too heavily on one investment theory or prediction for complex decision-making.

Buffetts Big Blunders

Buffett didn't invent the index but he has just been attributed to it. 

Buffett himself has said it's a useful snapshot but he wouldn’t rely on it alone.

Having read many of the books written by and about Buffett, I wondered whether anybody would even wish to emulate the path to success that Buffett has worn. 

Sure he's an extremely wealthy individual. 

But it hasn't all been smooth sailing, even the world’s greatest investor has made mistakes.

In fact, most people couldn't recover from the famous investment mistakes he's made. 

Like the miscalculation he admitted to about the long-term growth prospects of IBM, and other tech firms with an eventual loss of £2 billion in 2012. 

Buffett also conceded that he had made significant miscalculations in the growth prospects of Tesco, exiting with a $444 million loss. 

Or consider his $443 million loss in the early 90s by failing to account for the impact globalisation would have on the manufacturing of shoes when he sold US Shoe Company Dexter. 

What we can take away …

While we can learn some valuable lessons from Buffett, directly copying his strategy or following his predictions won't benefit us.

Particularly because, for us, precision not prediction is the key to planning.

You see this in the way we manage our financial plans in Wealthmap®.

For us, managing 100 Wealthmap® plans is like landing 100 rockets on the moon–we have to plan for and stick the landing every time.

We cannot undershoot with five individuals, we cannot overshoot with five individuals. We have to land everybody exactly where they're supposed to be at any given time to the best of our ability. 

We cannot be as unsuccessful as Buffet. Or spend billions of dollars tinkering with our rockets like Musk. 

Our strategy, and yours, must focus on your personal goals and the individual approach we have planned together. 

This way, you get a personalised, balanced and diversified process, rather than relying on a one-size fits all, celebrity approach.