Lacking Substance: Doug Kass Poorly Constructs Short Berkshire Thesis

Seabreeze Capital Fund manager Doug Kass, while making a few good value calls last few years, went public with short thesis on Berkshire Hathaway (BRK/b, BRK/a), Warren Buffett's holding company. We'll examine why I think his arguments are weak

Last year, Buffett made a change-up by inviting a short-seller to his annual shareholders meeting. As luck would have it the short seller was Doug Kass, who publicly presented his arguments on shorting Berkshire. As you can guess, after reading Kass's thesis, I was not convinced at all.

http://www.thestreet.com/story/10406915/1/kass-katch-11-reasons-to-short-berkshire.html

Here's a list of the worst arguments ever made:

1. "There will never be another Buffett, as the long-only value world has become increasingly competitive." What did you say Mr. Kass, you mean markets become smarter and more efficient over time? So insightful! (please note the sarcasm). While I do acknowledge that many more players have stepped into the value investing world and scooped up the low hanging fruit, please do not think that Buffett has been in decline; in fact, he was still at the top of the game as even a few years ago. As markets evolved, Buffett also has evolved as a learning machine, he and Munger would say. For example, in 2009, he sold 10-dated equity index options at the LOW of the market; so even while he himself says he doesn't time the market, Buffett sold insurance when premium was the most expensive. Also, note that the options he sold were uncollaterized, hence he understood the concept of CSA and collateral discounting before most banks moved to CSA / OIS discounting. To me, that trade still proved that Buffett is one of the best.
2. "Investors will dump shares if Buffett is no longer at the helm." In the short term, the market is a voting machine, but in the long run the market is a weighing machine. His demise does not really impact the future cash flows of his companies
3. "Growth has recently slowed." See counter-argument to point 1. As we shall see later, a recurring motif is that Kass has only 5 arguments, but somehow repeats a few of them to make 12 arguments. The only feasible point that he makes in the whole article is the fact that with so much cash, Buffett is a bit more limited in what he can invest in, since whatever he buys has to be large enough to move the needle for Berkshire.
4. "Salad days for insurance are over." See counter to point 1. Otherwise, I do not understand much about insurance. 
5. "Outlook for low investment returns and poor economic growth will make it tough for Buffett." Environment of low investment returns? Kass could not have been more wrong (see Ray Dalio). 2013 was an incredibly risk-on year when US equities returned almost 30% and certain real estate markets (New York, Bay Area, etc) also went through a huge bull market.
6. "Berkshire's premium valuation is byproduct of credit crisis and the company's perceived stability." First off, is there a premium on the valuation? I actually disagree vehemently that the company trades at a premium to its peers at 12x earnings. The P/E multiple needs to reflect the true risk of the business. Airlines need to trade at somewhere between 6x-8x earnings because the business is capital intensive, highly-levered, highly competitive, and laced with unpredictable costs. For Buffett, who can buy back his own stock at 1.2x book value, it seems the company is certainly not overvalued.
7. "Sum of parts and relative EPS comparisons imply Berkshire is overvalued." See point 6. This argument is a complete clone of point 6.
8. "As stock is sold in the marketplace, there could be an imbalance between buyers and sellers." And this imbalance is a bad thing? Incredibly poor argument. Again, in the short term, the market is a voting machine, but in the long run the market is a weighing machine. At a certain point, value investors will care to buy up the stock.
9. "Some of Buffett's biggest investments seem vulnerable to post bubble crisis." Well then, Buffett might not have expected a large post bubble crisis. 
10. "Law of large numbers work against Berkshire." See counter-argument to point 3.
11. "Weak disclosure at Berkshire." I would argue almost the exact opposite, that Buffett is very open about his mistakes, his positions, and his outlook for the upcoming year. His derivative positions are small in comparison to his other investments.

So there you have it. I am not going to lie, when I read this, I could not believe Doug Kass actually runs a fund; it would seem his Buffett short was more a publicity stunt than a well-crafted short thesis. Well, most of us in institutional investment management and trading obviously realize that capital is not always intelligently allocated...