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Going Short on Warren Buffett

Three weeks ago, I told you I realized that I will never own shares of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) .

This morning, I took the next logical step. I shorted Berkshire in Motley Fool CAPS, the community-driven stock-rating website. And just to get more bang for my virtual buck, I bet that both classes of shares will underperform the market over the next few months.

I'm clearly in the minority. Less than 2% of those rating Warren Buffett's legendary company on CAPS agree with me. The vast majority of CAPS participants believe that Berkshire Hathaway will continue to beat the market.

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

Take the Warren Buffett quiz
I've hit a sore spot in you. I can tell. You love Berkshire, Buffett, and Charlie Munger. 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.

But how well do you know Berkshire? Maybe you were one of the 30,000 cheerleaders in Nebraska three weekends ago. 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 has 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 S&P 500 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 Wrigley (NYSE: WWY  ) 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.

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 (NYSE: KO  ) and American Express (NYSE: AXP  ) , when there were bargains to be had in the 1970s and 1980s. However, some of his more recent buys, including Kraft (NYSE: KFT  ) and US Bancorp (NYSE: USB  ) , were still in the red at the end of 2007.

I hope I'm wrong
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.

US Bancorp and Kraft are Motley Fool Income Investor selections. Coca-Cola, Berkshire, and American Express are Motley Fool Inside Value selections. Berkshire is also a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz enjoys the wit behind Buffett's annual shareholder letters, but he does not own shares in any of the stocks in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool owns shares of Berkshire and has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 22, 2008, at 3:31 AM, valueconvert wrote:

    Step One in investing is to calculate the value of the company. I don't see where you've done that. A conservative estimate of BRK's value is 150,000 to 170,000, based on two column approach and DCF. A minimal estimate of value is 125,000 (i.e., BRK is worth no less than book + float + 1/2 deferred taxes). This means that shorting the stock here has a negative margin of safety, probably because of all the well-known negatives you've addressed, in addition to declining underwriting results because of the p

  • Report this Comment On May 22, 2008, at 5:22 PM, Trapper97 wrote:

    Buffett agrees with you as far as this year goes. Buffett also vailed an indication that the current market disruption is a lifetime buying opportunity for someone with his and Charlie's background. I intend to increase my BRK-B averaging over the next 10 months and watch the next 3 to 5 year payoff!

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