Warren Buffett, CEO of Berkshire Hathaway. AP-Yonhap News
Warren Buffett, chairman of Berkshire Hathaway, recently warned about the overheating of the U.S. stock market, comparing it to gambling.
Buffett: “This Is Neither Investing Nor Speculation, but Gambling”
According to reports from U.S. investment outlets including The Motley Fool on the 6th, Buffett criticized the excessive risk appetite in financial markets at Berkshire Hathaway’s annual shareholder meeting.
Buffett likened the stock market to “a church attached to a casino,” saying, “Long-term value investing corresponds to the church, while speculation aimed at short-term gains corresponds to the casino.”
He stressed, “The casino has become too attractive a place for people. This is neither investing nor speculation, but gambling,” adding, “Many assets are far more expensive than their actual value.”
Signs of market overheating can indeed be read in major valuation indicators. The Buffett Indicator has climbed to 232%, marking a record high. This indicator is calculated by dividing the total market capitalization of the U.S. stock market by gross domestic product (GDP).
Buffett had previously said that when this indicator approaches 200%, it is “like playing with fire.”
The Shiller CAPE (cyclically adjusted price-to-earnings ratio), which gauges whether the U.S. stock market is overvalued, has also continued to trade above 40 since May. The only previous case in which this indicator persistently exceeded 40 was just before the dot-com bubble in 2000.
However, The Motley Fool added, “One cannot conclude that overheating signals immediately lead to a broad downturn,” noting that “a strategy of holding companies with fair value and solid fundamentals over the long term is more important than short-term price movements.”
Korean Market “Roller Coaster” Continues
Meanwhile, foreign media views of the domestic stock market have not been entirely favorable either. British economic magazine The Economist compared Korea’s retail investors to “impulsive gamblers,” diagnosing that “it will not be easy to pull investors out of the casino.”
Indeed, the KOSPI and KOSDAQ have recently repeated unprecedented sharp swings. On the 28th and 29th of last month, sell-side sidecars and circuit breakers were triggered on both markets for two consecutive days. The shock of the plunge was immediately reversed the next trading day. On the 31st of last month, the KOSPI closed at 6,595.45, up 17.91% from the previous trading session, recording a historic rebound.
To ease such volatility, financial authorities are stepping up regulatory tightening. Starting on the 31st of last month, the minimum deposit requirement for single-stock leveraged products was raised. The move is interpreted as intended to calm market overheating while preventing the expansion of volatility caused by leveraged products.
In the securities industry, there are assessments that such regulations are having some effect in easing market overheating.
Lee Jae-won, a researcher at Yuanta Securities, analyzed, “The normalization process from extreme fear in the KOSPI and KOSDAQ is currently ongoing,” adding, “The decline in daily trading turnover rates following regulations on single-stock leveraged ETFs, as well as the easing of concentration in large-cap semiconductor stocks, also contributed to the spread of warmth.”
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