Is Warren Buffett Wrong on Stocks?

His view of the market is very different from yours.

By + More
Rob Russell
Rob Russell

Warren Buffett, one of the world’s most revered and famed investors, is super bullish on stocks, yet again. With the market now at highs not seen since before the crash of 2008 it’s hard not to feel good about your 401(k) and investment accounts once again. In a recent interview with CNBC Buffett said, “If you're asking me if stocks are cheaper than other forms of investment, in my view the answer is yes. We're buying stocks now. But not because we expect them to go up. We're buying them because we think we're getting good value for them.”

So, with the market at an all-time high Warren Buffett is giving the “all clear” to dive back into the equity markets, but should you follow the Oracle of Omaha’s advice or steer clear? He is after all, considered one of the smartest investors of all-time, so why shouldn't you follow him?

Well, I think he’s flat out wrong and here’s why:

Should Buffett Ignore His Own Advice?

Buffett offers some sage advice from time to time and one of my favorite pearls of wisdom of his is, “Be fearful when others are greedy, and greedy when others are fearful.” What he’s saying is when you don’t follow the herd your chances of success are better! Undoubtedly, this market rally is on the greedy backs of the herd, so should we follow his own advice to be more fearful? Is Warren ignoring his own advice?

Buy and Hope Revisited.

To me, and other rational investors, this market smells of the prolific euphoria found in the 2007 real estate and stock markets, right before the market priced in reality. I’m not saying that a market crash is imminent; rather I think it’s prudent not to follow Buffett's advice and go hog wild on U.S. stocks.

Understand that Buffett is very different than you and me. He has access to business deals that only a multi-billionaire could. His investment strategy for Berkshire Hathaway is significantly different than yours because Berkshire has no pulse. It has no life expectancy. It doesn't need income in retirement. It doesn't have the desire to leave a legacy for the kids and grandkids. Planning for an institution is very, very different than planning for you. Berkshire can afford to hold a stock for decades, and that’s the only way buy and hope works…if you can live long-enough. If you can hold a stock conceivably forever then buy and hope is a valid strategy. But where’s the advice on when to sell? There are always two sides of a trade: buying is the easy part, but selling is the hardest part of investing!

It makes good sense to include stocks in your portfolio, but do so prudently. The “Prudent Investor Rule of Thumb” gives you a great starting point. Take 100 minus your age and the remainder is the maximum a prudent person would have in stocks. For example, if you’re 58, then generally you should have no more than 42 percent in stocks.

(Nati Harnik/AP)

The Investing World Isn't Two-Dimensional.

Buffett’s bullish argument for stocks is predicated on the assumption that the only investments available are stocks and bonds. On CNBC he said stocks are not "as cheap as they were four years ago" but "you get more for your money" compared to other investments, and that, The dumbest investment, in my view, is a long-term government bond." While I actually agree with his disdain for government bonds, he’s implying that the investing world is only two-dimensional, which it’s not.

Look Beyond Stocks and Bonds.

Smart investors can do better than to follow Buffett’s advice this time around. I do agree that investors and money managers should have an allocation to equities, but in a prudent fashion, not as reckless as Buffett’s recent comments suggest. Approach your investment strategy with more than stocks and bonds in mind. There are more dimensions to the investing world and to create true Diversification you should consider including opportunistic real estate investments (specifically grocery-anchored and healthcare portfolios), managed futures funds that are trend-following focused, and money managers that employ quantitative strategies to hedge risk and lower correlation to stock and bond markets when suitable.

Robert Russell is the best-selling author of Retirement Held Hostage, CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and has been interviewed by CNBC, FOX Business, The Wall Street Journal, and several other national and international media outlets.