Warren Buffett discusses stock market valuation in an April interview with Yahoo Finance's Andy Serwer. He explains how the most important variable in measuring value is interest rates.

ANDY SERWER: I mean, it surprised me when you said you didn't think the market was overvalued relative to historical ratios.

WARREN BUFFETT: Well, you've got to crank in interest rates, because everything in valuation gets back to interest rates. And if you take the US treasury bill now, which is, we'll call it 80 basis points, [INAUDIBLE] maturity, that means that the US treasury bills are selling at 125 times earnings. Now, if your alternative is to buy something at 125 times earnings, or a good business whose earnings will probably increase at 15 or 18 times earnings, you've got to measure it against the risk. It isn't really a risk-free instrument, but the standard rate.

And in 1982, the rates got up 15 percent or thereabouts. And that makes a lot of difference. I mean, you've got a choice with money. What do you do with it? In Europe, if you put it in the bank, you will be charged for having it there. It's better to keep it under your mattress. So you've got a choice every day in what you do. And I think equities are cheaper than fixed-dollar investments.


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