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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 things have become riskier with a handful of stocks dominating the index.
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Buffett mainly avoids technical names, but Apple has been his number 1 stock for years.
Warren Buffett preaches that picking stocks and timing the market are fool’s errands for the vast majority of people. He says it’s best to simply invest in a low-fee S&P 500 index fund and hold it for the long term.
Only one handful of technology stocks have become so incredibly valuable that owning the market-cap-weighted S&P 500 is essentially a concentrated bet on those risky companies, and not a bet on the stock market as a whole, says Chamath Palihapitiya.
“This needs to be fixed or it will end in disaster,” the venture capitalist and cohost of the ‘All-In’ podcast said in an X message on Saturday. He was responding to a chart shared by Kevin Gordon, a senior investment strategist at Charles Schwab, which showed that the 10 most valuable S&P 500 companies accounted for 39.9% of the benchmark index’s total market capitalization as of Dec. 20 .
Apple, Nvidia, Microsoft, Alphabet, Amazon, Meta, Tesla, Broadcom, Berkshire Hathaway and Walmart are collectively worth about $21 trillion – a large chunk of the S&P 500’s market cap, which is roughly $50 trillion.
“Average Americans are buying S&P 500 ETFs in part because Buffett tells 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 storms.”
But the CEO of Social Capital and the first Facebook investor said the excessive weighting of a few stocks means that “when you buy an index of 500 companies, you are really buying 10 companies and 490 others.”
Palihapitiya said the lack of diversification means that if Big Tech stocks take a hit, investors could face huge losses as the pain to their portfolios won’t be much mitigated by other investments. Amateur buyers are facing a “rude awakening if this is not addressed,” he added.
It’s worth noting that Palihapitiya has received a lot of criticism for promoting risky special purpose acquisition deals (SPACs) during the pandemic and showed little remorse when its value craters.
A value investor who strives to stay within his circle of competence, Buffett has largely avoided technology stocks throughout his career because they tend to be expensive and he has no expertise in what technology companies do.