Warren Buffett and Michael Saylor are two of the biggest names in the investing world. Buffett has been running his company Berkshire Hathaway (BRK.A 1.37%) (BRK.B 0.86%) for decades and is considered one of, if not the best, investors ever.
Within Berkshire is a $300 billion-plus equities portfolio in which Buffett and his investing lieutenants buy and sell stocks, with Buffett often employing a more traditional value investing approach.
Meanwhile, Michael Saylor has operated in Silicon Valley since the early 1990s, running his data firm MicroStrategy (MSTR 11.56%). However, the company made a major pivot in 2020 and started buying massive hoards of Bitcoin, the world’s largest cryptocurrency.
On the face of it, Buffett and Saylor have very little in common, having taken two very different routes to becoming billionaires. In fact, Buffett has famously called Bitcoin “probably rat poison squared.” Yet, as unlikely as it seems, investors track a ratio involving both their companies to gauge market sentiment, and recently, that ratio did something not seen in almost 25 years.
Is the stock market about to make a big move? Let’s take a look.
Taking stock of animal spirits
Owen Lamont, a former Ivy League finance professor and now senior vice president and portfolio manager at Acadian Asset Management, developed the Saylor-Buffett ratio, which compares the cumulative return on MicroStrategy’s stock to the cumulative return of Berkshire Hathaway class B shares with the starting point in June 1998.
Lamont likens Buffett and Berkshire to traditional investing, while Saylor and MicroStrategy now primarily own Bitcoin, a volatile cryptocurrency that has worked out extraordinarily well.
Although Saylor and MicroStrategy have only been buying Bitcoin for a little over four years, Saylor also embraced the internet and tech stocks early in the 1990s and has always believed in innovation before it was mainstream. Lamont thinks the Saylor-Buffett ratio can gauge “speculative excess” in the market and, therefore, can be used to measure when investors have pushed the market into a bubble.
Lamont acknowledges that the Saylor-Buffett ratio is not scientific, and that there are plenty of financial ratios investors could use to gauge the stock market. However, the ratio has a good track record of predicting bubbles.
Chart by author; Data: Wise Sheets.
The higher the ratio, the more MicroStrategy has returned than Berkshire. A higher ratio also reflects investor confidence in more speculative assets and their willingness to buy more on emotion. The Saylor-Buffett ratio is now as high as it’s been since early 2000, right before the dot-com crash put a hiatus on the internet craze (data as of Dec. 18). This should be no surprise, considering Bitcoin recently topped $107,000 and high-flying artificial intelligence stocks have fueled most of this year’s strong market performance.
Should investors be worried?
I will reiterate that Lamont said the ratio is not scientific. If you follow market news and commentary, you’ll see many other ratios and indicators suggesting the market is overvalued and the U.S. economy could be due for a recession. The broader benchmark S&P 500 index is up over 50% in the last two years, which should be a warning on its own.
However, past trends are not always an indicator of the future, and the Saylor-Buffett ratio is still much lower than before the dot-com crash. The market surged for several years in the mid to late 1990s before the dot-com crash, so this recent bull rally could still have legs. It’s also possible that investors won’t let the kind of bubble that formed in 2000 happen again, and we could see a market pullback sooner rather than later.
Timing the market is tough. Most market bubbles or recessions are usually different from the past, or at least disguised with a different mask and difficult to detect. However, it’s good for investors to understand that the market seems overvalued on many accounts, so there could be a pullback at some point.
If you invest with at least a five- or 10-year mindset, you probably don’t have to change your portfolio too much. History shows that the market recovers from corrections and crashes, albeit at different paces. However, the more prepared you are, the better position you’ll be in to react or even prepare for a pullback, whether that means making some slight portfolio adjustments or doing nothing at all and having the awareness to remain calm.