Besides multi-billionaires, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) CEO Warren Buffett and MicroStrategy (NASDAQ:MSTR) CEO Michael Saylor don’t have much in common. One is a traditional investor in his mid-90s, while the other is in his late 50s and has branched out into newer investment ideas. Buffett has alluded to this before Bitcoin (CRYPTO: BTC) as ‘rat poison squared’, while Saylor thinks Bitcoin’s price could reach $13 million by 2045.
However, a former finance professor and Ivy League portfolio manager thinks there could be a correlation between MicroStrategy and Berkshire shares. He has called this correlation the Saylor-Buffett ratio. Interestingly, the ratio is doing something it hasn’t done since 2000, which could be a big move for the stock market.
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Owen Lamont, portfolio manager at Acadian Asset Management, created the Saylor-Buffett ratio and recently discussed the concept in a blog post. Lamont has used the ratio to monitor fear and greed in the market.
Sentiment is an important factor in determining what the market might do next. While many believe in efficient markets (and many others do not), markets are rarely efficient as you would expect and sentiment can be a reason. If investors are excited about stocks, it will likely take some time for the entire market to settle down, even if the market is overvalued. The same concept applies when markets are struggling: valuations may be attractive, but investor sentiment is negative and risk-averse.
Lamont believes that Buffett and Berkshire represent more traditional companies in the market, which makes sense considering that Berkshire operates insurance, mortgage, railroad and energy companies. Saylor is on the other end of the spectrum with a high-octane growth mindset. The Saylor-Buffett ratio looks at the total cumulative return of MicroStrategy’s stock divided by the total cumulative return of Berkshire’s Class B stock. Lamont acknowledges that he made up the ratio and that it is not a “scientifically valid measure derived from first principles.”
When the ratio is high, MicroStrategy’s stock outperforms Berkshire’s. This reflects investors’ exuberance in riskier assets and greed, and likely means the market is overvalued or getting frothy. Lamont found that the ratio peaked at 18 in February 2000, just before the Internet crash the following month. The Saylor-Buffett ratio remained below 1 for most of the next two decades, meaning that investor exuberance calmed down and favored subtle, proven long-term investments, a trend that Buffett and Berkshire have embodied for decades. However, the ratio started making waves in 2020, around the time the meme stock craze hit the market. I’ve recreated Lamont’s diagram below. The numbers are not exact, but they show a trend very similar to his graph.
The ratio peaked above 1 in 2020 during the meme stock craze. The price then fell as shares sold off in 2022, but is now steadily rising. Recently, the Saylor-Buffett ratio reached its highest level since the dot-com bubble. The ratio is not nearly as high, which could mean the bull market has room to operate. However, it is also possible that investors learned a valuable lesson in 2000 and will no longer be so enthusiastic.
The obvious point is that things are getting frothy – and the Saylor-Buffett ratio isn’t the only indicator of this. The S&P500 The Shiller CAPE ratio, which looks at the broader market’s price divided by the 10-year average of inflation-adjusted earnings, has also reached levels not seen since the early 2000s and 2021.
Berkshire has also spent much of the year stockpiling cash and staying away from stocks. The difficult thing is that the future is always different from the past. While the market may simply correct due to high valuations, it is also possible that a future stock market collapse will be caused by factors that are at least partially different from the last few corrections. Nevertheless, investors should view the Saylor-Buffett ratio as another warning about the market and proceed with caution.
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Bram Berkowitz has positions in Bitcoin. The Motley Fool holds positions in and recommends Berkshire Hathaway and Bitcoin. The Motley Fool has a disclosure policy.
Ever heard of the Michael Saylor-Warren Buffett ratio? It did something for the first time since 2000 and could cause a major move in the stock markets. was originally published by The Motley Fool
