Has the US Market Left The “Zone of Reasonableness”? Decoding Buffett’s Wisdom

Warren Buffett once said, "A very high percentage of the time, stocks are in what I call a zone of reasonableness. If you buy good businesses at reasonable prices and hold them, you’re going to make a lot of money. That’s true of stocks as a group, and it’s true of individual companies."

This gem of wisdom, shared in a 2013 interview on CBS This Morning, offers a timeless lens through which to view the stock market.

But what does this really mean? Is the market always “reasonable”? And how can we, as investors, use this insight to our advantage?

Let’s unpack Buffett’s comments:

The Market Is Efficient—Most of the Time

Buffett’s point is rooted in a fundamental truth: the stock market is usually pretty good at pricing businesses. Decades of academic research, like the Efficient Market Hypothesis, back this up—stock prices tend (!) to reflect all available information quite well.

Buffett isn’t saying the market is perfect at pricing securities, though. He’s saying that, more often than not, it lands in a ballpark that makes sense—a "zone of reasonableness."

But here’s the catch: it’s not always efficient! Markets can swing to extremes—think the dot-com bubble or the 2008 financial crisis. These are the moments Buffett hints at when he implies that stocks occasionally stray outside this zone.

For the average investor, though, the takeaway is simple: most of the time, you’re not buying into a screaming bargain or a wildly overpriced dud. You’re in the middle ground.

What’s “Reasonable” Anyway?

To understand Buffett’s “zone,” we need to dig into what determines a business’s worth. At its core, a company’s value should reflects the value of all future cash flows generated by the business discounted at an appropriate rate. This very discount rate depends on the returns investors are demanding to justify putting your money at risk.

However, Buffett’s use of the term “zone” is deliberate; there’s no single, magical number for intrinsic value. It’s a range, reflecting the uncertainty and variability in how "the market" (a term I’ll grudgingly use despite its vagueness) values businesses.