Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Is This Going to Be a Painful Correction for Unwary Investors?

27 views

Published on

http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors

Is This Going to Be a Painful Correction for Unwary Investors?

If you have ridden the bull market to higher and higher levels, is it time to take a little off the table and realize profits? The old saying is, by the way, that you do not have a profit until you take a profit. Is this going to be a painful correction for unwary investors? Market Watch notes one warning indicator which says that serious pain awaits investors.

One of those measures, in particular, has popped up on investor radars lately, and that’s the “Buffett indicator.” The Berkshire BRK.A, +2.83% boss called it “the best single measure of where valuations stand at any given moment.” If historical patterns hold true, a thrashing could be in store for complacent investors.

Put simply, the indicator is the total market cap of all U.S. stocks relative to the country’s GDP. When it’s in the 70% to 80% range, it’s time to throw cash at the market. When it moves well above 100%, it’s time to lean toward risk-off.

Where’s it now? Approaching 140% and a new record high.

A successful long term investor like Buffett relies on the strength of the US economy to drive up the value of his investments. Using intrinsic value as a guide, value investors buy stocks that they understand and stocks that are underpriced in relation to expected long term earnings. Those long term earnings are usually tied to the strength of the US economy. When the value of all US stocks grossly exceeds the value of the US economy, a painful correction is in store.

How Painful Might a Correction Be?

The last two times the total market cap of all stocks grew above the US gross domestic product, the end results were the 2008 stock market crash and the dot com crash. In each case, the losses were huge. The dot com crash erased about $6 Trillion in value. The 2008 financial crash erased closer to $14 Trillion. In the 2008 crash the S&P 500 was cut in half before it started to rise again.

Published in: News & Politics
  • Be the first to comment

  • Be the first to like this

Is This Going to Be a Painful Correction for Unwary Investors?

  1. 1. By www.ProfitableInvestingTips.com
  2. 2. If you have ridden the bull market to higher and higher levels, is it time to take a little off the table and realize profits? http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  3. 3. The old saying is, by the way, that you do not have a profit until you take a profit. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  4. 4. Is this going to be a painful correction for unwary investors? http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  5. 5. Market Watchnotes one warning indicator which says that serious pain awaits investors. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  6. 6. One of those measures, in particular, has popped up on investor radars lately, and that’s the “Buffett indicator.” http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  7. 7. The Berkshire BRK.A, +2.83% boss called it “the best single measure of where valuations stand at any given moment.” http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  8. 8. If historical patterns hold true, a thrashing could be in store for complacent investors. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  9. 9. Put simply, the indicator is the total market cap of all U.S. stocks relative to the country’s GDP. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  10. 10. When it’s in the 70% to 80% range, it’s time to throw cash at the market. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  11. 11. When it moves well above 100%, it’s time to lean toward risk-off. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  12. 12. Where’s it now? Approaching 140% and a new record high. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  13. 13. A successful long term investor like Buffett relies on the strength of the US economy to drive up the value of his investments. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  14. 14. Using intrinsic value as a guide, value investors buy stocks that they understand and stocks that are underpriced in relation to expected long term earnings. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  15. 15. Those long term earnings are usually tied to the strength of the US economy. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  16. 16. When the value of all US stocks grossly exceeds the value of the US economy, a painful correction is in store. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  17. 17. How Painful Might a Correction Be? http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  18. 18. The last two times the total market cap of all stocks grew above the US gross domestic product, the end results were the 2008 stock market crash and the dot com crash. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  19. 19. In each case, the losses were huge. The dot com crash erased about $6 Trillion in value. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  20. 20. The 2008 financial crash erased closer to $14 Trillion. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  21. 21. In the 2008 crash the S&P 500 was cut in half before it started to rise again. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  22. 22. Benefiting from a Market Correction http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  23. 23. All of that having been said, not everyone lost money in the dot com and 2008 market crashes. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  24. 24. Those who had the foresight to buy puts on their big winners walked away with their profits (minus the cost of the option contracts). http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  25. 25. Those who simply purchased puts on the most vulnerable stocks made out like bandits and are probably sipping rum drinks and lounging by their pools on their own tropical islands. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  26. 26. Timing a Market Correction http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  27. 27. Because perfect market timing is impossible, it can be really difficult to decide when to get out and when to stay in. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  28. 28. This is where options are useful because, for a small insurance fee (the premium) one can protect an investment portfolio or nail down a selling price throughout the duration of the options contract. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  29. 29. All of this you can do for simply the premium paid for the contract. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors
  30. 30. The leverage that options trading offers can result in spectacular profits when other unwary investors are losing their shirts. http://profitableinvestingtips.com/options-trading/is-this-going-to-be-a-painful-correction-for-unwary-investors

×