 Good day fellow investors. Now is the market overvalued? The question that comes around all the time now. Well I'll discuss today three measures that show how overvalued the market is and I'll discuss which one is the best. The first measure is of course the price to earnings ratio, the second measure is the cyclically adjusted price to earnings ratio and the third measure is the Warren Buffett market valuation measure that measures stock market capitalization and GDP. So let's first start with the price earnings ratio. The problem with the price earnings ratio is that it's extremely volatile. For example in 2009 when it was the best time to buy stocks or in 2002 the price earnings ratio were extremely high because of the past recessions and low earnings. So it doesn't really show what's going on in business cycles. Very volatile can be skewed by temporary activity so it's a measure to look but not really to take for granted. Therefore there is a better measure. The cyclically adjusted price earnings ratio that uses 10 year average earnings in order to eliminate cyclical influences. Here you can see how it's much less volatile than the price earnings ratio but still very volatile because there are some limitations to the caped ratios and I want to discuss them here. The first one is that many stocks don't have meaningful 10 year average earnings. Think of Facebook wasn't even traded until 2014 so you can't really look at caped ratios for Facebook. The second is that the length of a business cycle can be longer than 10 years or much shorter so the caped can be skewed by two or three recessions in a decade. Something unbelievable now but largely possible in the next 10 years. Thirdly, and this is more an accounting principle, the generally accepted accounting principles skew stocks earnings because when you have an asset you usually don't revalue it on the upside but if a company bought a building 50 years ago that building is now 10 times more valuable than it's on the books. If it's not revaluate you don't have to revalue it so it can be on the books at zero depreciated but it can have huge values. So those earnings are not in an income statement until a building like that is sold. On the contrary according to generally accepted accounting principles if the value of that building of that investment falls under what the company paid for it and under what is on the books then the company has to impair so or cancel out the value on the balance sheet. So earnings are negatively skewed over the last I think 30 years since that change was made to the generally accepted accounting principles. So earnings are brought down by impairments however not revalued by appreciation of the value of assets and that's something very important and that's why I always ask to go beyond the number really look at the building what's behind the number on the balance sheet. There are some beautiful companies that have low assets on the balance sheet but in reality those assets have huge value. So if the cape isn't good to determine whether a market is overvalued or not there is one measure that Buffett loves and prefers to see whether the market is overvalued or not and that's the whole market capitalization measured in relation to the GDP. That ratio economic activity and market capitalization should explain whether the stock market is overvalued or not and as we can see here the current ratio shows that the market is highly overvalued even more overvalued than it was at the end of the 1990s with the dot-com bubble or in 2007 with the housing bubble on the contrary when the ratio of the stock market capitalization to GDP was low you can see that it was a great time to buy stocks 1980s 2002 and 2009 2008 2009 so when that is low it's great to buy stocks. The problem is that since 2000 when the market was also overvalued as it is now it took the market 13 years to break even so investors that invest now in the SAP 500 I think they're looking again at last decade because if interest rates change then the SAP 500 will also be gravitated down so very very dangerous to invest. Now okay here is another video telling me that the market is overvalued but let's go let's go a step further and see what you can do that's the most important. The first thing is that the market is overvalued towards the GDP and sooner or later people are going to ask for high salaries there will be inflation there will be higher costs because companies cannot make such huge profits the problem is that the profits even didn't even grow in the last 10 years it's just evaluations when the interest rates revert it will be a terrible time for stocks so what you can do well as always look at investments from a business perspective and hedge I have discussed gold miners I have discussed emerging markets I have discussed companies that have good yields good dividends that are in developed markets so by creating such a portfolio it has good stable earnings or growth companies you can protect yourself over the long term when the SAP 500 enters in a beer market probably everything will crash but I can't time the market therefore the only thing is to find those stocks that over the long term will do good so if you stick to rebalancing your portfolio around the value investing strategy I think you can't go wrong over the long term please subscribe if you like the concept we discussed here there will be plenty more stocks as now on back from holidays so I'll dig more into stocks talk about specific investments research so I'll be happy to share that with you click subscribe if you haven't clicked like if you like the content leave your comments below ask questions I learned so much from your comments so thank you on that and I'll see you in the next video