On several occasions in the past I have referred to the fact that no one can determine what will happen tomorrow with absolute certainty. Some readers may disagree with me. If it’s Friday today, then I can tell you with absolute certainty that I will braai tomorrow. That’s a sure thing. But the truth is that I’m planning to braai tomorrow and based on what I do most Saturdays, there is a high probability that I will in fact braai.
If I should ever be so lucky, one person that I would love to invite over for a braai would be well-known investor Warren Buffett.
On more than one occasion Buffett has mentioned that one of the most important pillars his investment decisions rest on is probability. In his own words: “We make investment decisions based on our evaluation of the most profitable combination of probabilities.”
This week I would like to apply the concept of probability – not to look for investment opportunities, but rather to answer the question of what the probability is of a market crash, or more specifically, a crash in the US stock market, the largest one in the world. To answer this question, I will discuss three indicators which address the probability of a US market correction.
Market capitalisation as a percentage of GDP
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