Shawn Tully
5 min read
In the December 10, 2001 issue of Fortune, Warren Buffett wrote a landmark 7-page article that introduced a crucial market metric that became renowned as the “Buffett Indicator.” The Great Man adapted the piece from a speech he’d given that July at the annual Allen & Co. bash in Sun Valley, privately delivered to the audience mainly comprising top CEOs. It was the legendary Fortune writer Carol Loomis who persuaded Buffett to adapt and extend his remarks for the article. Carol was my mentor during my early career at the magazine; I had the honor of working as her research assistant (no coasting allowed!) and she displayed the noblesse oblige to edit a couple of my pieces.
Even then, Carol had a great friend in Buffett. For many years, she famously edited the Berkshire Hathaway annual letter. I’m sure she’d admit that his guidance helped hone her forensic skills to the point where Carol could dissect the true financial performance of big enterprises from ITT to Hewlett-Packard to Fortune‘s owner Time Warner—she trashed the now-notorious AOL merger practically on announcement, irking our C-suite—better than practically any Wall Street sage or portfolio manager. At his last annual address as CEO in May of 2024, Buffett saluted Carol’s terrific work in helping the Oracle of Omaha rule as the most heeded voice in the business world, and correctly praised her “as the best business journalist.”
The concepts Buffett presented a quarter century ago are timeless, and they’re especially relevant today because the yardstick that he tagged as pointing to danger then, looks even more ominous now. Buffett was writing at a time when the Dot Com bubble was deflating. In the piece, he identified why the drop was inevitable, and likely to continue big time. His thesis: The total value of U.S. stocks, over the long term, can’t outpace the growth of businesses as reflected in the GDP, so when the ratio of S&P 500 to national income diverts hugely from the norm, it was bound swing the opposite way and “revert to the mean”—though the timing of the retracement is impossible to predict. Buffett highlighted a chart in the text displaying that at the craze’s peak in March of 2000, that number, now revered as the Buffett indicator, reached a vertiginous 200%.
“The message of the chart,” he wrote, “is that if the relationship [between the total value of equities and GDP] drops to 70% or 80%, buying stocks is likely to work out very well for you. If it approaches 200% as it did in 1999 and 2000, you are playing with fire.” Indeed, the S&P had already fallen over 20% by the time the Buffett story appeared, and by mid-2022 retreated by almost one half from its peak, taking the Buffett Indicator below 80%. As the Buffett formula predicted, the tech rampage’s aftermath proved a great moment to buy.
