One of Warren Buffett’s top indicators signaled another stock market crash. According to the indicator, this crash could be even bigger than the drop back in March. In fact, it could even be bigger than the Great Recession.
The Warren Buffett indicator takes the Wilshire 5000 Index and divides it by the annual gross domestic product. As of the end of August, it is at its highest level since before the internet bubble burst back in 2000. As of writing, the current ratio is at 1.6, at its highest ratio since that bubble burst, when the ratio should be around 1.
What it means
Investors, and the general public, want this ratio to be around 1, which means that the GDP is and markets are fairly valued. The markets are considered overvalued when the ratio reaches around 1.3. So when a ratio hits a height like 1.6, that’s an incredibly overvalued market. This is due to the federal government continuing to spend enormous amounts, made even worse because of the pandemic.
This indicator predicted the bubble burst of 2000, when the ratio hit 1.7. It’s no wonder then that Warren Buffett looks to this ratio when judging the next market crash. It could also explain why Buffett hasn’t done any enormous investments after the last market crash.
What is Warren Buffett doing?
So what is Warren Buffett, and what should investors, be doing when this ratio arrives? The same answer as always: stay the course. There could be a huge fall, and it’s why long-term stocks are the best choice. It’s definitely not a time to sell everything, and certainly not a time to panic.
Instead, it’s a great time to look at your long-term holds — and keep holding them. Though if you have stocks that are reaching all-time highs that you’re looking to sell, it might be the time to take your gains. From there, start doing some research into stocks you’ll want to buy up in bulk during the market crash. That’s likely what Warren Buffett himself is doing at the moment.
The best long-term holds
So if you’re looking to buy up some long-term holds during the downturn, there are a number of options. For example, you could go with the classic such as banks or energy. But Warren Buffett is highly interested in one stock that just announced its initial public offering: Airbnb.
Warren Buffett admitted he wished he had come up with the idea of home sharing. And while there aren’t any Canadian options, there are companies that investors could see do just as well. One such company is American Hotel Income Properties REIT (TSX:HOT.UN).
According to fellow Fool writer Victoria Hetherington, American Hotel REIT is about 85% undervalued according to expected future cash flows. The reason of course is the pandemic. With no one able to travel, even between states and provinces, that means there was a steep decline in hotel investing.
Now, with travel returning to normal, there should be a big increase. Even if that increase is slow, investors are buying at incredible lows and should see huge gains over the long term.
In fact, the company has hit lows not seen by the company, leaving a potential upside of 200% just to reach pre-crash norms. On top of that, the company suspended its dividend from the pandemic. Once that kicks back in soon, that’s even more cash coming your way.
If you’re to follow Warren Buffett advice and hold onto a stock like American Hotel REIT long term, you could see huge gains in the near and far future. An investment of just $10,000 could turn into $30,000 in the next year, with dividends of $3,480 going by dividend history. So keep it on your watch list and wait for the crash to come.