Buffett said it is a "terrible mistake" for investors with long-term horizons - among them, pension funds, college and endowments and savings-minded individuals - to measure their investment "risk" by their portfolio's ratio of bonds to stocks.
The long-time bull on U.S. companies and the economy issued his latest letter to Berkshire Hathaway Inc shareholders on Saturday.
Treasury yields have been rising since the start of the year, stemming from brewing inflationary pressures and massive bond supply to help fund U.S. President Donald Trump's tax overhaul.
Higher rates have kept U.S. equity markets under selling pressure, as investors worry borrowing costs could hurt companies' profitability. Earlier this month, stocks suffered their first 10 percent pullback since early 2016.
High-grade bonds, he said, can increase the risk of an investment portfolio as inflation eats away at the return.
"There is simply no telling how far stocks can fall in a short period," Buffett said. "As an investor's investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates."
For its part, Buffett said Berkshire is sitting on $116 billion of low-yielding cash and government bonds - whose average maturity was 88 days as of year-end 2017. They are struggling to put that money to work because of a "purchasing frenzy" by deal-hungry chief executives employing cheap debt that pushed "prices for decent, but far from spectacular, businesses" to "an all-time high." [nL2N1QE0A4]
Known to fans as "the Oracle of Omaha," Buffett, 87, has suggested U.S. stocks are probably the best bet over time, encouraging people to make easy choices and stick with them, eschewing high-fee fund managers, for instance.
In 2014, Buffett said he plans to put 90 percent of the money he leaves to his wife, Astrid, when he dies into an S&P 500 index fund, and 10 percent in government bonds.
Buffett in 2007 bet a founder of the asset management company Protégé Partners LLC $1 million that a Vanguard S&P 500 index fund would outperform several groups of hedge funds over a decade. He won that bet last year. The proceeds were given to Buffett's charity of choice, Girls Inc of Omaha.
Yet his own unease with market prices comes as other investors have struggled with the same problem after a near-decade long bull market.
"Though markets are generally rational, they occasionally do crazy things," said Buffett, adding that investors need "an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals" even if makes them "look foolish."
"In America, equity investors have the wind at their back," he said.
(Reporting by Trevor Hunnicutt; Editing by Jennifer Ablan and Bill Trott)
By Trevor Hunnicutt