'Buffett needs to listen to Buffett again': Investor was wrong to recommend tech-heavy S&P 500, Berkshire Hathaway shareholder says

• Warren Buffett recommended the S&P 500 several times at Berkshire Hathaway's shareholder meeting this month.
• The famed investor effectively advised investors to back the "big tech" companies that make up a large chunk of the index, Tony Scherrer of Smead Capital Management $4.
• However, Buffett warned against "gruesome" businesses that grow quickly, require lots of capital, and generate minimal profits in his 2007 shareholder letter.
• "It looks to us like Buffett needs to listen to Buffett again," Scherrer said. "He is forgetting what gruesome looks like by fawning on the Index and some 'obvious' winners of today."
• $4.

Warren Buffett's advice to invest in the S&P 500 clashes with his past warnings against "gruesome" businesses, Tony Scherrer, director of research and portfolio manager at Smead Capital Management, a Berkshire Hathaway shareholder, $4.

"I recommend the S&P 500 to people," Buffett said at Berkshire's shareholder meeting this month, according to a transcript on Sentieo, a financial-research site.

The famed investor also described the benchmark index as "the best thing" for most people, and argued that telling them to park the majority of their wealth in index funds was "better advice" than most investment advisors offer.

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However, Scherrer pointed out that five companies account for more than 20% of the S&P 500's weighting: Apple, Amazon, Alphabet, Facebook, and Microsoft. As a result, Buffett effectively endorsed those large technology companies, he said.

"He recently emphasized indexing and didn't shy folks away from today's glamour tech stocks which require more and more capital," Scherrer said in the blog post.

Gruesome businesses

Buffett described "gruesome" companies that investors should avoid in his $4.

"The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money," he said.

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Several of the S&P 500's largest constituents fit some or all of those criteria, Scherrer argued. For example, Netflix's content costs are ballooning, Facebook's customer-acquisition and regulatory expenses are soaring, and Amazon still earns "measly" profits relative to revenue.

Therefore, Buffett's recent endorsement of the S&P 500 represents a major, wrongheaded shift away from his guidance 13 years ago, Scherrer said.

"It looks to us like Buffett needs to listen to Buffett again," he added. "He is forgetting what gruesome looks like by fawning on the index and some 'obvious' winners of today."

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