Berkshire Hathaway (BRK)

A case against BRK is that it has gotten too big. Because of its size it's hard to "move the needle." Warren Buffett has indicated that an expectation of achieving historic returns in the future is unlikely. This would make you think that BRK will underperform the market as a whole.

According to Warren Buffet: "The party is over. It’s a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise. Even if the U.S. has its third consecutive catastrophe-light year, industry profit margins will probably shrink by four percentage points or so. If the winds roar or the earth trembles, results could be far worse. So be prepared for lower insurance earnings during the next few years."

Berkshire, currently trading at 15 times earnings (down from over 18 at its high) seems to reflect some of this expected insurance deterioration. We may get a hurricane (or a series of them) in 2008, or not. Either way, insurance results will deteriorate and in concert so should Berkshire's as a whole. If they do not fall, one would expect them to stagnate.

BRK right now, works as an almost perfect insurance company. In this scenario, the prices it can charge for its services falls. Its margins actually begin to shrink. Then, invariably, there is a shock that causes a large disruption to the business and earnings fall, at times dramatically. Thus is the insurance business......

Much of BRK's success is a result of Buffett's methodologies, and with no clear successor(s), there is no compelling reason to believe that the superior returns he has produced will continue after he moves on.

As the USD weakens, BRK has made more international investments to create a short position against the dollar. This has the added effect of exposing BRK to greater international risk, some of which may not be hedged.