Why Is Warren Buffett Giving Bad Advice to Disciplined Investors?

3. American Express (NYSE:AXP): Warren Buffett had more than $14 billion invested in AXP at the end of 2014. Billionaires Ken Fisher and Mario Gabelli are also among the top 3 holders of the stock among the funds and investors we track. American Express announced a Q4 earnings per share of $1.39 and beat the expectations by a penny. The stock has a forward PE ratio of 14 which is cheaper than the average stock on the S&P 500 Index.

4. International Business Machines Corp (NYSE:IBM) is the most contrarian pick among Warren Buffett’s top 5 picks. In November 2013, famed hedge fund manager Stan Druckenmiller revealed his short position in IBM saying that the company’s business will be replaced by emerging technologies such as cloud computing. He said it was “one of the more higher-probability shorts I have ever seen” in an interview with Bloomberg TV at the Robin Hood Investment Conference. The stock declined more than 10% since then. Buffett has been adding to his position which trades at a forward PE ratio of about 10. Billionaires Ken Griffin and David Harding seem to be supporting Buffett’s long-term positive view with modest positions.

5. Wal-Mart (NYSE:WMT): Warren Buffett and Bill Gates’ Foundation have the largest positions in Wal-Mart among the investors we track. Billionaire hedge fund manager Andreas Halvorsen (Stock Picks, Investor Letters), who returned an average annualized net gains of 17.8% since 1999, also initiated a new position in Wal-Mart.

Warren Buffett gave disciplined investor bad advice by telling them to stick with low-cost index funds. If we didn’t have any better alternatives like investing in hedge funds’ best small-cap ideas, and our two options were investing in Buffett’s top 5 ideas or very low-cost index funds, we’d invest in Buffett’s top 5 ideas. The reason is simple. These stocks have lower volatility than the rest of the market and performed better than the market by 4.5 percentage points recently. We’d rather take our chances with Buffett’s picks than follow a bunch of guys who work at S&P (members of its index committee) and managed to underperform Warren Buffett’s pick by a large margin over the years.