Warren Buffett, the CEO of Berkshire Hathaway and a legend in the investment world, has long advocated for average investors to put their money into low-fee S&P 500 index funds. This advice was rooted in the simplicity and long-term promise of these funds. However, Chamath Palihapitiya, an influential venture capitalist, argues that this approach has become riskier over time due to the increasing dominance of a few massive companies within the index.
Despite typically steering clear of tech stocks, except for a substantial investment in Apple, Buffett has consistently pointed out the difficulties of stock picking and market timing for most people. His recommendation was for investors to stick to a low-cost, diversified S&P 500 index fund and let it grow over time.
Palihapitiya, however, warns that the current state of the S&P 500 has deviated from Buffett’s initial vision. The dramatic rise in value of a handful of tech giants—companies like Apple, Nvidia, Microsoft, Alphabet, and Amazon—means the index has become heavily weighted in their favor. On a post shared Saturday on X, he highlighted a revealing chart from Kevin Gordon at Charles Schwab. This chart showed that the top ten companies now make up almost 40% of the S&P 500’s market capitalization.
As these giants swell to an approximate $21 trillion in total value, nearly half the S&P 500’s market cap, Palihapitiya expresses concern. He notes that many everyday investors are drawn to S&P 500 ETFs because of Buffett’s endorsement, expecting a broad exposure to the top 500 companies. Instead, what they’re unknowingly getting is an outsized reliance on just ten dominant players with the remaining companies simply along for the ride.
Palihapitiya’s argument goes further, suggesting that if these tech stocks were to falter, the fallout would severely hit investors’ portfolios with little cushioning from other sectors. He warns that without addressing this imbalance, investors could face significant financial setbacks.
It’s noteworthy, however, that Palihapitiya himself has been criticized for supporting risky SPACs during the pandemic, which plummeted in value, with him showing minimal regret over the losses incurred.
Throughout his career, Buffett has focused on value investing, often steering clear of the tech sector simply because it’s generally priced too high and lies outside his expertise. Yet, despite this, Apple has held the largest position in Berkshire’s portfolio for many years. Buffett’s company, Berkshire Hathaway, is also known for its wide-ranging investments, including stakes in Coca-Cola and Bank of America, and ownership of businesses like Geico and See’s Candies, underscoring its broad diversification strategy.
Previously, Buffett dismissed worries about his portfolio’s concentration in Apple, but the current market trends might nudge him to reconsider the implications for amateur investors following his advice blindly, primarily when the index is so tech-heavy.
[This article originally appeared on Business Insider]
