The Michael Saylor-Warren Buffet Ratio, scarcely resembling its past state in approximately a quarter-century, has sparked speculation about an imminent significant shift in the stock market.
The Michael Saylor-Warren Buffet Ratio, scarcely resembling its past state in approximately a quarter-century, has sparked speculation about an imminent significant shift in the stock market.
Warren Buffett and Michael Saylor are two prominent figures in the investing sphere. Buffett, renowned for his company Berkshire Hathaway (BRK.A -0.39%) (BRK.B -0.56%), has been a mainstay for decades and is widely regarded as one of, if not the greatest, investors in history.
Berkshire Hathaway manages a substantial equities portfolio valued at over $300 billion, where Buffet and his investment team engage in buying and selling stocks, employing a traditional value investing strategy often.
On the other hand, Michael Saylor, established in Silicon Valley since the early '90s, heads MicroStrategy (MSTR -3.24%). In 2020, the company underwent a significant transformation and started accumulating massive Bitcoin holdings, the world's largest cryptocurrency.
At first glance, Buffett and Saylor appear to have very little in common, as they took different paths to billionaire status. Buffett even famously labeled Bitcoin as "probably rat poison squared." However, investors track a specific ratio involving both companies to evaluate market sentiment, and recently, this ratio displayed an unusual trend that hasn't been seen since the late '90s.
Is a substantial market shift imminent? Let's delve into it.
Tapping into the animal spirits
Owen Lamont, an ex-Ivy League finance professor, now serving as senior vice president and portfolio manager at Acadian Asset Management, developed the Saylor-Buffett ratio. This calculation compares MicroStrategy's stock cumulative returns to Berkshire Hathaway class B shares, with the base point set in 1998.
Lamont views Buffett and Berkshire Hathaway as traditional investment, whereas Saylor and MicroStrategy are predominantly Bitcoin investors. Despite only purchasing Bitcoin for a few years now, Saylor, like Buffett, was an early adopter of internet technology and tech stocks in the '90s. Lamont contends that the Saylor-Buffett ratio acts as an indicator for "speculative excess" in the market, offering insight on when the market has become a bubble.
Although the Saylor-Buffett ratio isn't scientific, it has a successful track record in predicting potential market bubbles. However, Lamont acknowledges that various financial ratios can be utilized to analyze stock market turbulence.
As of December 18th, the ratio has reached heights not seen since the early '00s, just before the dot-com crash curbed the internet boom. Unsurprisingly, Bitcoin recently peaked at $107,000, while high-flying artificial intelligence stocks led most of the market's rebound in 2021.
Cause to be alarmed?
Lamont reiterated that the ratio lacks scientific rigor. Market analysis and commentary show that numerous ratios and indicators suggest the market may be overvalued, with another recession possibly looming in the US economy. The S&P 500 index has risen over 50% within the previous two years, which is a noteworthy red flag all by itself.
Past trends do not always foreshadow the future, and the Saylor-Buffett ratio remains significantly lower than at the height of the dot-com bubble. The mid to late '90s rally continued for several years before the dot-com crash, suggesting that this recent bull market rally could still persist. Alternatively, it's plausible that investors will be more vigilant to prevent a bubble reminiscent of 2000, and a market pullback could occur sooner rather than later.
Predicting market trends is not straightforward. Market bubbles and recessions often present in unique forms, making them challenging to spot in advance. It is, however, crucial for investors to comprehend that the market is generally overvalued based on several factors, which might lead to a correction at some point.
If you invest with a longer-term perspective, five to ten years, your portfolio modifications may not be extensive. History demonstrates that markets recover following corrections and crashes, albeit at varying speeds. However, being well-prepared and keeping a watchful eye will better position you to respond or prepare for a pullback, whether this entails minor portfolio adjustments or remaining steadfast in the face of market fluctuations.
Despite their differing approaches to investing, with Buffett focusing on traditional value strategies and Berkshire Hathaway's equities portfolio valued at over $300 billion, and Saylor leading MicroStrategy's Bitcoin investments, their financial performances have unexpectedly aligned in recent times.
The Saylor-Buffett ratio, which compares MicroStrategy's stock cumulative returns to Berkshire Hathaway's class B shares since 1998, has reached levels not seen since the early 2000s, sparking concerns of a potential market shift or bubble.