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Warren Buffett has long recommended a low-fee S&P 500 tracking fund to amateur investors.
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Chamath Palihapitiya says it has become riskier as a handful of stocks now dominate the index.
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Buffett stays away from tech names, but Apple has been his No. 1 stock for years.
Warren Buffett preaches that picking stocks and timing the market are foolish tasks for the vast majority of people. He says your best bet is to simply invest in a low-fee S&P 500 index fund and hold it for the long term.
But a handful of tech stocks have become so incredibly valuable that owning the market-cap-weighted S&P 500 is basically a concentrated bet on those risky businesses, not a bet on the stock market as a whole, Chamath Palihapitiya says.
“This needs to be fixed or it will end in a disaster,” the venture capitalist and co-host of the “All-In” podcast said in an X post on Saturday. He was reacting to a chart shared by Kevin Gordon, senior investment strategist at Charles Schwab , which showed that the 10 most valuable companies in the S&P 500 accounted for 39.9% of the benchmark index’s total market capitalization as of December 20.
Apple, Nvidia, Microsoft, Alphabet, Amazon, Meta, Tesla, Broadcom, Berkshire Hathaway and Walmart are worth about $21 trillion combined, a big chunk of the S&P 500’s roughly $50 trillion market capitalization.
“Average Americans buy S&P 500 Index ETFs, in part, because Buffett told them to,” Palihapitiya said. “They were told they would pay very little and diversify into the world’s top 500 companies to weather the storms.”
But the CEO of Social Capital and an early Facebook investor said the huge weighting of just a few stocks means that “when you buy an index of 500 companies, you’re actually buying 10 companies with another 490 included.”
Palihapitiya said the lack of diversification means that if Big Tech stocks take a hit, investors could suffer huge losses as the damage to their portfolios won’t be mitigated much by other holdings. Hobbyist buyers face a “rude awakening if this issue is not addressed,” he added.
It’s worth noting that Palihapitiya has been widely criticized for promoting high-risk special purpose acquisition deals, or SPACs, during the pandemic and showing little remorse when its value plummeted.
Buffett, a value investor who strives to stay within his circle of competence, has largely avoided technology stocks throughout his career because they tend to be expensive and he lacks experience in what technology companies do.