Warren Buffett’s Most Outdated Piece of Advice (but Can It Still Work?)

Warren Buffett has shared many timeless classics, like being fearful when others are greedy and being a patient investor. The Oracle of Omaha has outperformed the stock market for so long and serves as an example for many investors. However, some of his advice has become outdated over the years, and you shouldn’t follow every suggestion just because of who said it.

These are some of the ideas that have lost a bit of their merit but still hold value.

Put 90% of Your Cash in S&P 500 Funds and the Remaining 10% in Bonds

Buffett has been an advocate of investing in index funds instead of looking for opportunities in the stock market. It’s good advice for people who don’t want to learn about stocks and would prefer to take a hands-off approach. The advice on bonds is a bit questionable since inflation can outpace bond interest payouts, especially when considering that bond interest is treated as ordinary income for taxing purposes.

You can earn a lot more money by doing some research and looking for growth stocks. Investing in Nvidia five years ago would have produced a 1,300% return compared to the S&P 500’s 88% return during the same stretch. Picking the right stocks can quickly multiply your money, and depending on how much you invest, you only have to make one good pick to set yourself up for a quicker retirement.

Watch Out: Warren Buffett: 10 Things Poor People Waste Money On

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Derivatives Are Financial Weapons of Mass Destruction

Buffett has also referred to derivatives as financial weapons of mass destruction, and there is some merit to this. Speculators who are engaging in short-dated, far out-of-the-money options can watch their money evaporate in a short period of time. This is an extreme scenario that ignores how some derivatives can move you closer to wealth.

Long-dated, deep in-the-money call options can significantly boost your portfolio if the stocks and indices you choose go on a rally. This type of options trading strategy aligns with long-term investing.

Suppose an investor had $7,000 and wanted to buy into a growth stock that is valued at $100 per share. They could buy 70 shares with their $7,000. However, the investor can also buy a long-dated, deep-in-the-money call that lets them buy 100 shares at $105 per share. The investor doesn’t have $10,500 right now to make that happen. However, the investor can invest $4,000 into the options position now and then have the remaining $6,500 ready before the options contract expires.

If the stock doubles before the options contract expires, you end up turning $10,500 into $21,000 instead of only turning $7,000 into $14,000. If the stock loses value, your options contract won’t become worthless since it is deep-in-the-money. The stock would have to crash for the option to become worthless, and in that case, even a long position would have lost significant value.

Long-dated, deep-in-the-money calls (LEAPs) can be a great resource for building wealth. This is the exact strategy Nancy Pelosi used to maximize her exposure to stocks she knew would perform well. However, it’s worth being cautious of other options trading strategies. Any speculative use of derivatives can lead to financial destruction.

Risk Comes From Not Knowing What You’re Doing

This Buffett tidbit is a bit outdated. Yes, it’s risky to get into a stock if you have no idea what you are doing. However, companies have inherent levels of risk that are present even if you know what you are doing. Investors can’t anticipate substantial foundational changes to a company’s business that happen overnight.

Furthermore, it’s become much easier to access the information we need to make more informed investments. Articles, videos and social media platforms make it easy to access information. More investors know the risks of various assets but choose to invest in them anyway. It’s not a lack of knowledge that is affecting most investors nowadays.

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