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There is an indicator that Warren Buffett once called the best tool for assessing the state of the stock market at any given time . And now this indicator has reached its historical maximum. This is called the Buffett indicator. At the time of this video recording, it is about 230%—the highest level in the entire history of observations.
Simply put: the entire US stock market is now worth more than twice the value of the entire US economy. This is higher than the peak of 2021. This is higher than the dot-com peak in 2000. We are in uncharted territory . But before you panic and sell everything, take a deep breath, because the meaning of this indicator for your money is much more complicated than the scary headline.
Let me break this data down for you from both sides and tell you exactly what I do in this situation. My name is Nolan Goa. My students call me Professor Ji, and I created this channel to make investing easier. Remember that any investment involves risk. So do your own research. This is not financial advice and I am not a financial advisor.
OK. So what is the Buffett indicator? Let's explain everything simply. Buffett's indicator is just one fraction. You take the total value of the entire US stock market and divide it by the size of the US economy, i.e. GDP. That's all. It shows how large the stock market has become compared to the real economy that underlies it.
Why is it named after Buffett? In his 2001 essay, Warren Buffett called this ratio, quote: "the best tool for assessing the value of assets at any given point in time." And he gave us some guidelines. He said: "If the indicator drops to the 70-80% level, buying stocks will most likely bring you a good result." " But if it gets close to 200%, as it did in 1999 and part of 2000, you're, again, he said, playing with fire." So, it's time to face the truth .
Buffett said that 200% is playing with fire. We crossed the 200% mark back in September 2025, and now we are in the 230% range. How does the current situation compare to history? This comparison is actually quite shocking. Current figures are about two standard deviations above the long-term trend line.
Simply put: we have statistical overheating, and it's not just insignificant. Independent analysts currently classify the market as highly overvalued. Compare this to previous peaks during the dot-com crash in 2000 according to this modern metric. Typically, the indicator was in the 140% range at that time.
In 2021, the figure exceeded 200% before the 2022 sell-off occurred. Today it is about 230%. So, we are above both of the last major peaks. And this is not the only indicator that points to the same thing . Let's take the Shiller ratio ( CAPE), which smooths out 10-year returns. It's now around 41. Its long-term average is around 17.
And that's the main point. Breaking the 40 mark has only happened once in a century of data , during the dot-com bubble of 1999–2000 . Next is the typical forward price-to- earnings ratio for the S&P 500 index. It is about 20 expected annual earnings, which is higher than the 5-year and 10- year averages.
So we have three completely different assessment indicators measuring different things, but they all point in the same direction. The market is historically expensive. Before I tell you what this means for your money and what the smartest investor of all time does with his cash, I want to tell you about something really exciting that I created for you.
Many people constantly ask me: " Professor, what do you do?" For example, what exactly did you buy last month? What are you looking to buy this month? How do you operate your portfolio? Instead of just showing your portfolio at the end of the year, what small changes did you make each month to achieve that percentage return?
That's why I created my "Investing Simplified" community on the Skool platform. This is where I gather everything in one convenient format. Every month I publish an updated list of stocks I follow. I'm breaking down my portfolio so you can see exactly how I allocate my capital. We host weekly live broadcasts, a true community of disciplined investors who strive to achieve financial freedom faster.
So you're not alone with this . This is the most important moment . There will always be noise. There will always be problems in the world, or perhaps just here in the United States. Something as big as the crazy performance of Buffett's indicator could happen. What are we to do with all this? This group helps me stay grounded, and I personally communicate with the participants live every week to figure everything out.
There are basic and premium levels, and I made the login as accessible as possible on purpose. The link is in the description below. Join us on Skool. But okay, let's get back to the data. Here is the information that is actually important to you. Here is what you need to understand about this indicator.
This is not a time-selection tool. He never specified an exact date for the sale. The market can remain expensive for years and then continue to grow. And this is exactly what we have been seeing over the last year, or actually two years. Therefore, anyone who uses the Buffett indicator to scream about an approaching crash is using it incorrectly.
In fact, it tells you something calmer and much more useful. When you buy at such high valuations, history says your long-term returns are likely to be lower. Not zero, but lower. You are paying a premium price, so you should expect less reward over the next decade. And this is where it gets really interesting.
Look at what Buffett's own company is doing. Berkshire Hathaway has a record cash reserve, nearly $400 billion as of the first quarter of 2026. This is a historic high for them. Berkshire has been a net seller of stocks for more than twelve consecutive quarters, selling significantly more than $150 billion worth of shares than it has bought since the end of 2022.
Of course, Buffett and his team are proceeding cautiously. They are not saying that collapse is inevitable. By their actions, they are saying that they have a hard time finding things worth buying at these prices. Buffett even said, and I like this phrase: "We've never had people in such a gambling mood as we do now." So they're quietly accumulating this huge cash reserve because they see this indicator and it worries them, but it shows that they're not panicking.
They are simply demonstrating patience. But to be fair , there is a strong argument on the other side. And I would certainly be doing him an injustice if I didn't show him to you. So let's do a little reality check on this "bear " scenario, as it's definitely not the whole picture. Many very smart people argue that the Buffett indicator is now significantly less useful than it used to be, and they have valid points.
First, corporate profit margins are structurally higher than they were before. Companies today retain about 12% of GDP as profit compared to about 7-8% in the past. If businesses simply became more profitable, perhaps they deserve a higher rating relative to the economy. Secondly, international inconsistency.
Giant companies at the top of the market, like Microsoft, Meta, or Apple, make a huge chunk of their money abroad, but US GDP only takes into account what is produced domestically. So, the top of the market reflects global returns, while the denominator of the fraction only takes into account the domestic economy.
This makes the ratio seem more extreme than it actually is. The third is concentration. A few megacorporations now make up about 41% of the entire S&P 500 index. So the entire index is being pulled up by a few very expensive giants. The most fair conclusion is this. Buffett's indicator is probably overestimated or isn't explaining something quite as well as it used to.
But even after taking into account all that has been said and all the caveats, the market is clearly still very expensive right now. All roads lead to the same place, just be honest about the scale. So, this is my favorite part. What are we actually supposed to do with all this information? Buffett's record high indicator does not mean that you should immediately sell everything and sit on cash.
Let me give you my three rules for when the market is so expensive. Rule number one: don't try to guess the moment. This indicator has been high for quite some time, and those who sold everything when we crossed the 200% mark last September missed out on further growth. Timing the market is still better than trying to guess the market.
If you invest fixed amounts each month in your regular index funds, continue to do just that. Discipline is more important than predictions. Rule two: let the rating influence how you buy, not whether you buy at all. When the entire market is expensive, that's when the price you pay matters the most .
This is where selectivity pays off. Instead of chasing what has grown the most, look for areas of value. Quality companies that have already sagged and are trading at a discount. If you watched my other recent video, I talked about six great companies that each fell more than 25% from their highs. This is the right approach for an expensive market: buy value, not hype.
Rule three: keep your " powder dry" like Buffett. You don't need $400 billion in cash, but having some stock will allow you to take advantage of a real market pullback, instead of panic selling. Fear creates discounts. Cash allows you to use them. And that's why the Skool community I talked about earlier is so important.
Together we discuss which stocks and ETFs are profitable right now and support each other's discipline. The watchlist is updated monthly , and you get direct access to me for any questions. Join us on Skool via the link below or in the pinned comment at the very top. Then watch this video if you want to create the simplest yet most reliable ETF portfolio on the market.
It usually outperforms the entire market while reducing risk. Or watch this to continue investing with confidence. Remember that investing should be simple.
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