Going Short On Warren Buffett

Here's an interesting piece by Motley Fool editor, Rick Aristotle Munarriz. He think BRK will underperform the market over the next few years and has shorted the stock. However, as one of the commentors has pointed out, shorting BRK here has a negative margin of safety!

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.

Trains, sweets and watches - what Warren Buffett is looking for

by Graeme Wearden.

Warren Buffett, who today kicks off a whistle-stop tour of Europe, became the world's richest man thanks to a simple strategy - buying companies that he understands when they are available at a good price.

Avoiding the complicated financial techniques that caused the ongoing credit crisis, Buffett built up a $62bn (£31.68bn) fortune through a lifetime of sensible investing. Now he has Europe's family owned firms in his sights, with potential targets thought to include the confectionery firm Haribo – maker of the gummy bear. He is also rumoured to be casting his eye over the Swiss watchmaker, Swatch.

The 77-year old put his homespun values into action last month by teaming up with Mars to buy chewing gum maker Wrigley. Joking that he had been conducting an extensive taste test on Wrigley's products since he was seven, Buffett explained why he had not instead pounced on a bank savaged by the credit crunch.

"I understand a Wrigley or a Mars a whole lot better than I understand the balance sheet of some of the big banks. I know what I'm getting on this and [with] some of the large financial institutions, I really don't know what's there," he said.

This kind of no-nonsense approach to investing has won him many thousands of admirers, who flock to the annual meeting of his Berkshire Hathaway empire.

Buffett is also a big fan of Cherry Coke, downing as many as five cans a day. Typically of the man, he is also holds a large shareholding in Coca-Cola – another company whose products will always be in demand, he argues.

Back in the late 1990s, Buffett was criticised for ignoring the dotcom bubble while other investors flocked to put money into the next big thing. That now looks like one of his sager punts. Technology has little appeal to Buffett as an investment opportunity – he prefers more traditional industries, and is a particular fan of the railroad sector.

Railroads tick another Buffett box – he loves to build up stakes in industries that generate plenty of cash. Last year he kept building a stake in Burlington Northern Santa Fe, which runs one of the US's biggest rail networks.

But despite this track record the Sage of Omaha is not averse to the more exotic financial transactions, as long as he can see profit. Betting that the Brazilian currency would rise last year – it did – helped him to grow his fortune by $10bn, putting him top of the Forbes rich list.

He also loves to buy family owned firms, who he says are happier to sell to him than to a private equity firm which might want to make a quick return through a break-up.

Buffett has little time for reckless speculation, which is at its most dangerous in the boom times. Or as he puts it: "Nothing sedates rationality like large doses of effortless money."

And his visit to Europe this week fits with an earlier explanation of Berkshire Hathaway's strategy: "We attempt to be fearful when others are greedy and greedy when others are fearful."

After nine months of economic uncertainty and a credit crunch, the time for greed may have arrived.