Ideas & Debate

What Warren Buffet ratio says of the Nairobi bourse

The stock market is not the same as economy and should  not, therefore, be compared as there are diverse interpretations. file photo | nmg
The stock market is not the same as economy and should not, therefore, be compared as there are diverse interpretations. file photo | nmg 

A Google search for “Warren Buffett’s favourite indicator” will return several million hits and you can find dozens of articles citing this indicator—market capitalisation (cap) to gross domestic product (GDP) ratio.
As the name suggests, this metric compares the total price of all publicly traded companies to gross domestic product.

It’s also thought of as a way to judge the valuations for all companies relative to the total amount of the country’s economic activity.

More importantly, according to Buffett, when the resulting figure is above 100 per cent, its proof that stocks are pricey but when the percentage falls to the 70 per cent or 80 per cent area, buying stocks is likely to work for you.

Great. But here comes the question: is the indicator useful to the average local investor? I am doubtful.