There are a million different “buy signals” that investors use to determine when it’s the right time to enter the market.  Some investors study charts for hours, looking for signs that a particular stock or the market in general has hit a low point and will be bouncing back in the positive direction.  Others bet based on historical trends, such as stock market performance when a democrat is in the White House or when the AFC wins the Super Bowl.  It’s not a perfect science obviously, but there are signals that investors generally agree are good indications of attractive buying opportunities.

One of the most respected investors in the world is Warren Buffett.  A long term, buy-and-hold investor, Buffett has made billions of dollars through savvy stock picks and owning quality companies for the long haul.  One of Buffett’s core beliefs is that it’s a good time to buy stocks when the total value of the stock market is less than the output of the U.S economy, or its Gross National Product (GNP).   Obviously over the past several months, the value of publicly traded companies has plummeted.  It appears that they have finally reached the point where their value is only 75% of GNP, telling Buffett and others that we have reached a great buying opportunity.

This chart, courtesy of CNN’s website, shows the relationship between stock values and GNP over the past 85 years.  As you can see, the last time stocks were this cheap compared to production was in the mid 1990’s, which led to the biggest rally in stock market history.  During our last recession in 2001, with this ratio at 133, Buffett didn’t see a great buying opportunity.  But he did say that if stocks fell into a range between 70 and 80% of GNP, it would signal a good time to buy.

Buffett is a big fan of another famous investor, Ben Graham, who once said about the stock market, “in the short run it’s a voting machine, but in the long run it’s a weighing machine.”  It’s impossible to say when the scales will tip in the positive direction again, but historically dips like this have proven to be a great time to buy.

Back in October, just before the stock market hit its November lows, Buffett wrote an op-ed piece in the New York Times in which he stated that he was aggressively buying quality American companies at bargain prices for the first time in years.  He said that 100% of his money would be in US stocks if the market kept falling.  Although we can’t say for sure what Buffett’s portfolio looks like at the moment, it’s safe to say that he’s very bullish on American companies right now.

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Tags: GNP, Warren Buffett

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