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Short Seller Tells CNBC Why Warren Buffett Has Met His "Watergate"

Doug Kass
Doug Kass

Short seller Doug Kass tells CNBC's Larry Kudlow he thinks Warren Buffett has lost his way, and Kass is betting on Berkshire Hathaway's stock to fall.

In an appearance tonight (Monday) on Kudlow and Company, Kass, who is President of Seabreeze Partners Management, explains why he's taken a short position in Berkshire. (Going 'short' involves selling borrowed stock, then repaying the loan with stock bought at a lower price. The short seller thus generates profits when a stock drops.)

"Yogi Berra once said, 'Even Napoleon had his Watergate.' (Laughter.) And in the case of Warren Buffett, his Watergate is an investment-style drift which is really a no-no in the money management business... You have to stick to your knitting...

"Look, I worship at the knee of Warren Buffett and all he's accomplished over the years. But the reality is in the last decade he's underperformed dramatically and he's drifted in terms of strategy. He calls derivatives 'financial weapons of mass destruction' yet he has about 40 billion dollars on his books and lost 1.2 billion in the first quarter. And everyone admires him and goes to the Woodstock of Capitalism in Omaha and praises his accomplishments. His stock is starting to do poorly.

"And frankly, in terms of being a value investor, he's opened up his book in the last decade and there are many Buffett wanna-bees who follow exactly what he does, so it's much harder for him to do what he does.

"You look at this largest investments. He has 9 to 10 billion dollars in Coca-Cola , Wells Fargo , and Bank of America . Those stocks have flat-lined for nine years."

Kass' short position in Berkshire was mentioned in an interview published by Barron's over the weekend with the title Confessions of a Short-Seller. Kass discussed his concerns about Buffett's 'style drift' and derivatives.

He adds that partly because hedge fund managers have gotten more aggressive about looking for value plays, "Berkshire Hathaway's outperformance versus the market has been narrowing in the last decade, and I expect that will continue. Investors are going to dump the shares if Buffett is no longer at the helm, though I'm not signaling that he plans to step down anytime soon."

Kass also tells Barron's he thinks "the salad days for insurance, which is the cornerstone of Berkshire's business, are over."

Kass has been making the case against Berkshire in his writings on TheStreet.com, including a list of 11 Reasons to Short Berkshire, posted on March 10. Calculated from that day's close to today's close, Berkshire Hathaway is down 5.7 percent while the benchmark S&P is up 12.0 percent.

Today in Kass' Q&A Left Me Wanting More on TheStreet.com, Marek Fuchs takes issue with Kass' Berkshire concerns, and the Q&A format of the Barron's interview, which Fuchs says makes it "hard to frame, challenge or dispute the subject's thoughts and claims." (Fuchs praises some of Kass' other short calls.)

Kass isn't the first to argue over the years that Buffett has lost his touch. Many of those who have bet against him in the past have lost out in the long-run. It's very hard to argue with the world's richest man.

Still, in the short-run of the last few months, Berkshire has dropped while the market has gained, giving some support to Barron's own call last December to "Sell Buffett" when Berkshire was going for $143,000 a share.

While even Buffett himself has warned repeatedly that Berkshire won't be able to match its past performance, he can't be happy when it underperforms the market.

The important thing to remember, however, is that Buffett doesn't look at the short term. He's grades Berkshire's performance on a much larger scale of years, not months. Indeed, both could conceivably claim victory if Kass is able to profit from a relatively short-term Berkshire decline while Buffett and the faithful hold out for the long-haul.

Current Berkshire price:

See Warren Buffett Watch on CNBC's The Call, most weekday mornings at 11:50a ET

Questions? Comments? Email me at buffettwatch@cnbc.com