Warren Buffett tells people to buy the S&P 500 index fund. A celebrity tech investor says they are facing a “rude awakening”.
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Warren Buffett has long recommended a low-fee S&P 500 tracker fund to amateur investors.
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Chamath Palihapitiya says it has become riskier as a few stocks now have too much influence on the index.
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Buffett generally stays away from tech names, but Apple has been his No. 1 stock for years.
Warren Buffett preaches that stock picking and market timing are folly for the vast majority of people. He says the best bet for the average person is to simply invest in a low-fee S&P 500 index fund and hold it for the long term.
But the venture capitalist raises the alarm, claiming that a a handful of tech stocks have become so valuable that owning the market-cap-weighted S&P 500 is essentially a concentrated bet on those risky businesses, rather than a bet on the stock market as a whole.
“This has to be fixed or it’s going to be a disaster,” said Chamath Palihapitiya, a venture capitalist who hosts the “All-In” podcast. X post on Saturday. He was reacting to a chart shared by Kevin Gordon, senior investment strategist at Charles Schwab, that showed the 10 most valuable S&P 500 companies accounted for 39.9% of the benchmark index’s total market capitalization on Dec. 20.
AppleNvidia, Microsoft, Alphabet, Amazon, Target, TeslaBroadcom, Berkshire Hathaway and Walmart are worth a combined roughly $21 trillion — a large chunk of the S&P 500’s roughly $50 trillion market capitalization.
“Average Americans are buying S&P 500 ETFs, in part because Buffett told them to,” Palihapitiya said. “They were told they would pay very little and get diversification into the top 500 companies in the world to weather the storms.”
But the director of social capital and early Facebook The investor said that overweighting a few stocks means that “when you buy an index of 500 companies, you’re actually buying 10 companies with 490 others.”
Palihapitiya said the lack of diversification means investors could suffer huge losses if Big Tech stocks take a hit, as the pain for their portfolios won’t be significantly eased by other holdings. Amateur buyers face a “rude awakening if this is not addressed,” he added.
It’s worth noting that Palihapitiya has been widely criticized for promoting high-risk special purpose purchase agreements, or SPACs, during the pandemic and showing little remorse when their value full of craters.
Buffett, a value investor who tends to stay within his circle of competence, has largely avoided tech stocks throughout his career because they tend to be expensive and he lacks expertise in what tech companies do.
