It's time to bet against Buffett

By The Motley Fool

Three weeks ago, I wrote a column about why I will never buy shares of Berkshire Hathaway (BRK.B, news, msgs), where renowned investor Warren Buffett spreads his risk by investing in a variety of businesses, from insurance companies to railroads to hamburger chains.

This morning, I took the next logical step. I shorted Berkshire on MSN CAPS, the community-driven stock-rating Web site. As wisdom-of-the-crowd experiments show, collective estimates are often superior to the estimates of most individuals. The ratings and comments from the CAPS community aren't always right, but there's value in a system that incorporates the knowledge, information and skills of more than 100,000 participants.

• MSN CAPS: Investors helping investors

To get more bang for my virtual buck, I bet that both the Class A and the less-expensive Class B shares of the Omaha company will underperform the market over the next few months.

I'm clearly in the minority. Fewer than 2% of CAPS participants who have rated Berkshire Hathaway agree with me. The vast majority believe that Buffett's company will continue to beat the market.

I don't see it that way, and not just because of Buffett's cautious tone during this month's annual meeting of Berkshire shareholders.

I've hit a sore spot in you. I can tell. You love Berkshire, Buffett and Charlie Munger, Berkshire's vice chairman and, like Buffett, a native of Omaha, Neb. You think I'm wrong, and if you're an investor, I hope you're right. You have real money at stake here. I'm just betting against the company in a stock-market simulation.

Take the Warren Buffett quiz

But how well do you know Berkshire? Maybe you were one of the 30,000 cheerleaders in Nebraska three weekends ago at the annual meeting. Maybe you're one of the few who can rattle off the names of the roughly 70 operating companies under Berkshire's watch. Prove it. I have a few simple questions for you. The answers follow.

1. Berkshire Hathaway improved its book value per share at a compounded annual rate of 21.1% from 1965 to 2007. That's impressive. When was the last calendar year in which Berkshire topped that 21.1% average?

2. How old is Warren Buffett?

3. From 1965 to 2000, how many times did Berkshire fail to grow its book value per share? How many times has it failed to grow since then?

4. Berkshire's book value outpaced the Standard & Poor's 500 Index ($INX) in all but three years between 1965 and 1998, an amazing track record over 34 years. How many times has the company come up short over the past nine years?

5. How much in unrealized capital gains was Berkshire sitting on at the end of 2007?

Here are the answers

1. Believe it or not, you have to go back to 1998 to find the last time Berkshire topped its compounded average. That annual compounded metric has been falling every year since then.

2. Buffett is 77. He's in great shape, but he can't last forever. Even bulls are thinking about his eventual successor. If you're not concerned about that, then maybe you should be concerned about not being concerned. Sure, there are plenty of worthy replacements, but that's the problem. These days, there are a ton of Buffett wannabes in the form of private-equity firms and activist value investors.

This is why Berkshire has had such a hard time finding good values. Remember when it bought See's Candies for five times pretax profits back in 1972? Compare that with how it overpaid for a chunk of confectioner Wm. Wrigley Jr. (WWY, news, msgs) last month. This is the reality of what Berkshire has been reduced to buying, now that everyone is playing Buffett's game.

3. After a jaw-dropping streak, Berkshire proved fallible in 2001. The company's book value shed a mere 6.2% that year, but don't get too excited about the new streak of positive returns that began in 2002. We're still early in 2008, and Berkshire is off to a bad start -- first-quarter profit fell 64% on an unrealized $1.6 billion pretax loss on its derivative contracts. Its insurance businesses also generated lower profits in the period.

4. After beating the market 91% of the time through 1998, Buffett has been outmaneuvered by the passive S&P 500 in three of the past nine years, and two of the past five. Berkshire hasn't topped the market by a double-digit figure since 2002.

5. Berkshire has $35.7 billion in unrealized gains. That's not supposed to send taxing fears down your spine, because it's a testament to Buffett's ability to buy great companies, such as Coca-Cola (KO, news, msgs)and American Express (AXP, news, msgs), when there were bargains to be had in the 1970s and 1980s. However, some of his more recent buys, including Kraft (KFT, news, msgs) and US Bancorp (USB, news, msgs), were still in the red at the end of 2007.

Again, I won't be happy if I'm right.

A lot of you no doubt own a piece of Berkshire. However, Buffett is concerned about the company's bread-and-butter insurance industry. The valuations it's snapping up are far removed from when Berkshire built its empire. Yet Buffett is still buying. In short, that's not the bandwagon for me.

This article was reported and written by Rick Aristotle Munarriz for The Motley Fool.