Everybody knows Warren Buffett.  He has been called “the greatest investor ever.”  He is the primary shareholder and chairman and CEO of Berkshire Hathaway and is currently ranked as the third wealthiest person in the world.  He knows his stuff.

Everybody in the investment arena, and regular viewers of CNBC, know Bill Gross.  He was called “the nation’s most prominent bond investor” by the New York Times.  He is the co-founder of Pacific Investment Management (PIMCO) and the portfolio manager of the largest bond fund in the world, the PIMCO Total Return Fund.  He is currently the 897^th richest person in the world.  Not as rich as Buffett, but pretty impressive.   He obviously knows his stuff too.

Buffett and Gross are definitely two of the brightest minds in the investment world.  So, how can it be that when they look at the most recent economic data, they come up with completely different ideas on how to position their investment dollars?  Not only are their strategies different, they are the exact opposite of each other.

A week or so ago, Business Week reported that “Warren Buffett shortened the duration of bonds held by his Berkshire Hathaway after warning that deficit spending could force inflation higher.”  Bond prices move lower when interest rates move higher.  So, an active manager of a bond portfolio will usually shorten the duration of bonds when they are expecting higher interest rates because short-term bonds are less affected than longer-term bonds.  They are trying to reduce the risk to their bonds that comes with higher rates.  So, the logical conclusion of the Buffett move is that he expects interest rates to start rising soon.

Bill Gross has been doing just the opposite.  In his Total Return Fund, he has been actively increasing the duration of his bonds.  In fact, the fund is weighted towards the long end more than it has been in years.  Obviously, Gross is not expecting higher interest rates or inflation.  In fact, he has positioned his portfolio for deflation.

I’ve written about this type of situation in the past.  We’ve got two heavyweights in the investment world with completely different views on what is going to happen in the economy, and therefore completely different views on what to do with their portfolio.  One of these “Masters of the Universe” will be wrong.  Which one do you think it will be?  Are you certain enough to bet your portfolio on it?

It’s no different from what you can see played out on CNBC every day.  In one segment we’ll see a smart, well-dressed and well-intentioned (we think) expert tell us why the economy, or the market, or an individual security will do very well in the short-term.  In another segment we’ll see a different expert, who is just as smart, well-dressed and well-intentioned tell us why the economy/market/security is in trouble.

What is the average investor to do?  Once again, this presents a very strong case for the use of a passive investment philosophy.  As small investors, we can’t afford to gamble with our portfolio by trying to decide which guru is going to be right…this time.  A passive investment strategy eliminates the guesswork.  The investment portfolio is diversified across several different asset classes.  The mix is determined by the investor’s goals, cash needs, and risk tolerance.  Once the portfolio is properly diversified, the only buying and selling that occurs are the trades necessary to keep the mix in balance with the original target.  If an asset class moves higher and becomes a bigger percentage of the portfolio than our target, we sell enough to get back to the original target.  At the same time, we buy the asset class that has moved lower to bring it back up to its’ target percentage. 

Buy low; sell high…what a concept!  And it comes without trying to guess which one of the many “experts” of the investment world is right this time.