A Mixed Week and an Update on My Bet against Buffett

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

It was a mixed week for both U.S. and global stock markets.

Both the Dow Jones and S&P 500 ended the week close to where they started (up 0.19% and down 0.35%, respectively). The tech-heavy NASDAQ fared worse, tumbling 2.29%. With Russia’s takeover of Crimea fading from the news, the MCSI Emerging Markets Index recovered 1.01%.

The biggest gainers in your Alpha Investor Letter portfolio included the Market Vectors Gulf States Index ETF (MES), up 1.45%, and Berkshire Hathaway Class B Shares (BRK-B), up 0.97%.

The entire biotech sector endured one of its occasional sharp sell-offs, with the Market Vectors Biotech ETF (BBH) tumbling 8.57%. I don’t believe this is the beginning of the end for the biotech bull, and I view the recent pullback as a buying opportunity. I expect to be adding to my own personal positions in the sector in the coming days.

Several of your positions slipped below their 50-day moving averages and moved to a HOLD. These include Visa Inc. (V), Market Vectors Biotech ETF (BBH)Global X Guru Index ETF (GURU) and Las Vegas Sands Corp (LVS).

Yesterday, Marketwatch.com ran three stories about my $25,000 bet with David Rolfe of Wedgewood partners. Mark Hulbert weighed in on our bet, as well. You, of course, learned about the bet before anyone else in the last issue of The Alpha Investor Letter.

I also asked Marketwatch to poll readers on whose position they would support. Would small caps outperform Buffett between now and 2024? As it turns out, folks have a tough time betting against Warren Buffett. Marketwatch readers are voting overwhelmingly for Berkshire by about 2 to 1.

This is interesting for a couple of reasons.

First, it shows that even 15 years of data confirming that small caps have outperformed Berkshire matters little. Explaining a relatively abstract concept like the “small-cap” effect (which has a track record well over twice as long as Buffett’s own) cannot vie with uncritical adulation for the “Oracle of Omaha.”

Second, it confirms that startling drop in Buffett’s returns over the past 15 years has not yet penetrated the collective investor consciousness. Until around 2000, Berkshire’s annual returns approached an astonishing 30% per year. Since then, its performance has deteriorated markedly. Had Berkshire been able to continue its streak of 30% annual returns since 2000, its Class B shares would be trading at roughly $1,429 per share rather than $124.47. And Berkshire’s market cap would top $3.5 trillion — within striking distance of China’s hard-currency reserves.

Truth be told, I find the collective skepticism encouraging. As the philosopher Arthur Schopenhauer observed:

“All truth goes through three stages. At first it is ridiculed. Then it is violently opposed. Finally, it is accepted as obvious.

We’ll find out where we stand in 2024.

Portfolio Update

iShares MSCI Ireland Capped Investable Market Index (EIRL) lost 2.60% last week. Despite the recent correction in this index, the Irish recovery continues to gain steam. Ten-year borrowing rates that were 15% just three years ago are now 2.9% and the budget deficit remains on track to disappear by 2015. EIRL bounced upwards yesterday from its 50-day moving average (MA) and its extreme oversold position. This is likely a good time to add to your position. EIRL is a BUY.

Google Inc. (GOOG) fell 4.34% last week, along with most of the technology sector, as the NASDAQ logged an unusually tough week. Reports are surfacing that Apple is considering releasing an Android app that would grant Google users direct access to the vast offerings of iTunes — the most popular and extensive trove of content around. Although this would benefit Apple’s content sales, it removes one of the most noted barriers for migrating from iOS to Google’s ecosystem — effectively increasing Android device sales. Overall, this would be a win for Google should it come to pass. Falling below its 50-day MA, GOOG changed to a HOLD.

Guggenheim Spin-off ETF (CSD) gave back 2.42%. Corporate spin-off activity remains healthy so far this year with many companies posting spin-off plans for the first half of 2014. Big names such as Time Warner, General Electric, DuPont and Sears Holdings show up on the docket of 2014 divestitures. CSD is a BUY.

WisdomTree Japan SmallCap Dividend (DFJ) dipped 0.86% over the past five trading days. Japan has one of the few small-cap sectors trailing the recovery of its large-cap sector, setting a bullish tone for this sector in the coming months. With DFJ taking a second bounce this week from a significant, recently-tested low, Japanese small caps may be poised for a move higher. DFJ is a HOLD.

iShares S&P Global Timber & Forestry Index (WOOD) ended the week essentially flat as it neared its 200-day MA. WOOD has remained above the 200-day MA for nearly all of the past year. In fact, the last time it touched this level, WOOD rallied 9% to a new 52-week high. Couple this with its recent correction and strong oversold condition, and WOOD looks due for a bounce. WOOD is a HOLD.

The Blackstone Group L.P. (BX) lost 3.83%. Morgan Stanley reiterated its “Overweight” rating on BX last week and increased its price target to $37.00 — a 12.5% premium above yesterday’s close. BX will report earnings on April 17, before markets open. BX is a BUY.

Market Vectors Gulf States Index ETF (MES) added 1.45%, making it a standout gainer. Standing well clear of the U.S. market pullback last week, this bet on the Gulf States highlights the benefits of global diversification. MES is a BUY.

Recent Appearance

Watch Fox Business interview me yesterday about my Buffett bet.

Latest Special Reports

I invite you to take a look at the new 2014 version of The Top 12 Stocks You Should Buy Right Now, which features three of my top investment recommendations, as well as bonus picks from each of my fellow investment newsletter editors at Eagle.

In addition, as a courtesy, read my other recent special reports, Earn 20% Dividends from the New Switzerland, Profit for the Next 30 Years with the 21st Century GEBeat Buffett for the Next Decade: 3 Investment Strategies Perfectly Positioned to Outperform the Oracle of Omaha for the Next 10 Years and Alpha Opportunities: Where the Smart Money is Investing Now which includes time-critical information you can use  as 2014 begins. These special reports and others are accessible FREE on my website to you and other subscribers.

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