Even as the major stock indices head toward all time highs despite the geopolitical issues that are hitting the news almost everyday, there is one person who appears to be taking a more sanguine approach. The sage – Warren Buffett, who rarely ever reveals what his next big investment is going to be, is telling us something that all of us, mere mortals, would do well to be pay some attention.

The latest results from Berkshire Hathaway Inc. show that the Oracle of Omaha has plenty of cash sloshing around. Another increase in the total cash position from last quarter to $129.6 billion suggests Warren Buffett is still having difficulty in finding value in U.S and global stocks. It is worth noting that Berkshire Hathaway’s cash pile grew in 1998-99, just ahead of the bursting of a tech-stock bubble, then again in 2005 to 2007, as markets again became frothy. But then the company used the period from 2000 to 2003, and then 2007 and 2009, to buy assets at lower valuations even as markets were melting down.

And, Berkshire’s growing mound of money comes as the stock market is just three weeks away from making history as the longest bull market on record. So, what is Warren Buffett trying to tell us about being fully invested in equities, through his cryptic but growing cash position?

Future Wealth’s View

While it is impossible to get an clear understanding of how geniuses like Warren Buffett think, there is one esoteric indicator that has become to be known as Buffett Indicator. Most fund managers look at macro indicators like inflation, employment growth, consumer confidence and even relative P/E’s of major indices but Warren Buffett’s go-to chart has been one that no one pays attention to and maybe one that we should all pay sometime looking into, now that markets are getting to be borderline frothy.

It is one that sage himself has called “the best single measure of where valuations stand at any given moment”. 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 step aside. Where is it now? Approaching 140% and a new record high. And this is at a time when the denominator – GDP is hitting high growth numbers.

While it would impetuous to use this one indicator to call a bear market or a signal to an imminent correction, we, at Future Wealth, think Warren Buffett, as always, is on to something that the rest of us simply don’t see. It is obvious that there are ton of good billion dollar companies out there that Berkshire Hathaway could own outright tomorrow but, in resisting to do so, Warren Buffett is telling us that the same companies are going to be worth a lot less in the not so distant future. And, that’s when he is going to pounce.

In the early 1940’s, less than a few years removed from the end of the great depression, Sam Walton started a company (now popularly known as Walmart) on the premise that customers will never love a company unless its employees love it first. Very few cared for its noble mission and Walmart attracted very little money and was largely self funded. By the 1990’s, there were dozens of his neighbors and colleagues who were hitting their heads against the wall saying “I wish I had listened to Sam”.

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