Warren Buffett has become one of the world’s richest people
by sticking to his value-investing strategy of holding assets for the long term. But most people should ignore his advice of buying stock funds as their values are dangerously stretched, said strategist Michael E. Lewitt.
“People should remember that Mr. Buffett is a multi-billionaire with an infinite time horizon and no need to ever withdraw a dollar of his capital to pay his bills,” Lewitt said in this month’s edition
of his Credit Strategist newsletter. “For the rest of the human race who have to depend on their capital to fund the cycles of life, such advice is incredibly elitist and dangerously detached from reality.”
Buffett has said repeatedly
that investors should put their money into exchange-traded funds that track the moves of the broader market. The Vanguard S&P 500 ETF and the SPDR S&P 500 ETF Trust, for example, are two of the most popular funds that enable people to invest in a broad portfolio of indexed stocks.
Lewitt said Buffett’s advice leaves most investors “exposed to an increasingly overvalued market.” The S&P 500 is growing more vulnerable to a drop of more than 10 percent — a “correction” in Wall Street parlance — after rising to record levels while the economy shows signs of weakening, Lewitt said.
“It has been more than 800 days since a 10 percent correction (a period only exceeded in 1999 and 2007),” he said, referring to prior stock bubbles that collapsed by about 50 percent or more. “Sophisticated investors are taking steps to protect themselves.”
He pointed to the doubling in price of five- and 10-year put protection in the past nine months as evidence that investors are growing more concerned about a correction. A put is an option contract to sell an asset at a pre-set price. A put’s value rises when the market price of an asset falls.
“The rise in long-dated equity put prices may signal an increasing fear that a substantial market correction is on the horizon, despite low short-term put prices which suggest low probability of a near-term draw-down,” according to a report from
investment bank Goldman Sachs Group Inc.
Lewitt said retail investors should consider protecting themselves from a market sell-off by buying shares of the ProShares Short S&P 500 ETF, which rises when the market declines.
Lewitt also criticized Buffett for participating in deals that herald job loss and suffering for more Americans. Buffett helped to finance last month’s proposed acquisition of Kraft Foods by private-equity firm 3G Capital, which previously had bought H.J. Heinz Co. and slashed 7,000 jobs.
“I’m all for capitalism,” Lewitt said, “but watching Berkshire-Hathaway swallow up more companies and fire more disenfranchised Americans so that Warren Buffett can die richer doesn’t seem worth cheering for.”
Meanwhile, Buffett’s stake in International Business Machines Corp. has taken a beating since he first bought shares in the tech giant in 2011, according to TheStreet.com
“From November 4, 2011 to March 27, 2015, IBM fell 13.9 percent without dividends,” according to the financial website. “At Buffett's scale of ownership of IBM, the Oracle of Omaha has lost hundreds of millions of dollars by sticking with IBM and not switching to, say, Apple or Microsoft.”
Apple’s stock more than doubled while Microsoft gained 56 percent since Buffett announced his purchase of IBM stock, TheStreet.com said.
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