The following article is part of The Motley Fool's "Stock Madness 2006," based loosely on the annual NCAA College Basketball Tournament, a.k.a. "March Madness." Throughout the competition, our writers and analysts will engage in head-to-head competition. You, dear readers, are the fans and referees -- after you read these exciting duels, your votes will determine who moves on to the next round of play. The writer who survives the tournament will be our champion and most valuable "coach."

But please, make no mistake -- "Stock Madness 2006" is a GAME!

It's Round Two, and I've earned a date with Charly Travers' Biotech Hype Machine. Awesome.

Great companies make for great returns
My portfolio consists of five very different stocks:

Company

Market Cap*

Industry

Berkshire Hathaway (NYSE:BRKb)

$136,000

Conglomerate

Valero
(NYSE:VLO)

$36,000

Refinery

American Financial (NYSE:AFR)

$1,500

REIT

Old Dominion Freight Lines (NASDAQ:ODFL)

$960

Trucking

National Research (NASDAQ:NRCI)

$140

Health-Care Services

*Data in millions.

Given these positions, here's what we have working to get us great returns:

  1. Warren Buffett, the world's greatest investor.
  2. Diversification among industries and market caps.
  3. Smart, dedicated management teams.
  4. Business models with defined competitive advantages.
  5. Companies poised to blow away the market's expectations.

I detailed further in Round One why the risk/reward profile of these five stocks -- together -- is so incredible.

Fire up the hype machine
Now, I like Charly a lot. He's a good guy and one of the savviest biotech investors I know. But be warned: He's going to trot out a lot of numbers to show how well his stocks have performed in the past.

But past is not prologue. The return data merely proves that his biotech monsters are expensive now relative to their risks. Take Exelixis, for example. I admit that this stock looks like an incredible opportunity. Yet while the company has a pipeline that goes 10 compounds deep, only one of those compounds has made it through critical phase 2 trials. None has been approved. Even Charly admits that there's no way they will all make it to market, and that Exelixis is burning cash at an "alarming rate." (Access to the other end of the link requires a subscription.)

What does this mean for investors? Risk. Volatility. A stock price that could drop at any moment on scientific results that the layman will find nearly impossible to decipher.

Moreover, there's a reason why Charly finds Amgen more attractive than a big pharma like Merck (NYSE:MRK) or Pfizer (NYSE:PFE): It's not dealing with massive lawsuits or expiring patents. But it could. Someday.

The Foolish bottom line
Risk is the nature of biotech. And while there is a place for biotech (and a stock like Exelixis) in every portfolio, there's no reason why expensive biotech stocks should make up 80% of that portfolio. That's a recipe for sleepless nights and mediocre returns -- even if one of these companies finds the cure for Avian Mad Cow Bubonic-itis.

The growth stories for my companies, however, are already in place. Three could double in price over the next few years, while Berkshire and Valero continue earning phenomenal returns. That's a recipe for market gains and, hopefully, Round Three.

Oh, and go Hoyas!

Charly Travers' rebuttal
Don't shy away from Team Biotech just because of Tim's scaremongering use of the "R" word. Yes, there is risk in biotech. No doubt about that. But there's another "R" word in the equation, and that is "reward." The companies on my team have been carefully selected. I believe that the rewards of superior returns exceed the risk of owning them. Yes, there will be volatility, and possibly even a blowup, but five years down the road, this portfolio will have smashed the market.

Who wins this round? Take a look at Charly Travers' team, and then cast your vote.

Tim Hanson is a Georgetown alum and owns shares of Berkshire Hathaway, Valero, andIncome Investorrecommendation American Financial Realty. Fool biotech analyst Charly Travers owns shares ofRule Breakersrecommendation Exelixis.Merck is an Income Investor pick, and Pfizer is anInside Valueselection. The Motley Fool's disclosure policy is Final Four-caliber.