NicholasVardy

Bloomberg

Warren Buffett

It takes a lot chutzpah to bet against Warren Buffett — arguably the greatest investor in history. Yet much to my own surprise, that’s exactly the position I’ve unexpectedly found myself in.

In late February, Marketwatch published my article, “Has Warren Buffett lost it?”

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In that article, almost as an afterthought, I noted that I didn’t think Warren Buffett would be willing to bet that shares of his Berkshire Hathaway BRK.A, +1.10%   would outperform a U.S. small-cap index over the next 10 years.

Frankly, I didn’t think the bet would be so controversial. After all, Berkshire has struggled to match the returns on the S&P 500 SPX, +1.26%  since the dot-com bust in 2000. And as U.S. small caps have outperformed the S&P 500 consistently by a couple of percentage points each year across many decades, I thought the bet was a no-brainer.

Then longtime Berkshire investor David Rolfe, of St. Louis, Mo.-based Wedgewood Partners, contacted me, indicating that he was willing to take Buffett’s side of the bet.

Here are the terms of the wager as we set them out.

Rolfe invested $25,000 in Berkshire Hathaway’s Class B shares BRK.B, +1.55%  at the closing price on March 3, 2014, at $116.06.

Nicholas Vardy

I invested the same amount in the Vanguard Russell 2000 Index ETF VTWO, +1.62%  on the same day — at $93.20.

A decade later — on March 3, 2024 — if Berkshire’s performance is ahead, I write a check to Rolfe’s designated charity for the amount by which Berkshire outperformed the Russell 2000 RUT, +1.72%  ETF.

If the ETF ends up ahead, then Rolfe writes my designated charity a check for the amount by which VTWO outperforms Berkshire.

We agreed to look at investment researcher Morningstar’s “total return” numbers — that is, which investment makes the most money — and ignore calculations of risk-adjusted returns.

In betting against Berkshire, I am not making a judgment about the company or the quality of its investments.

After all, Berkshire remains a current recommendation in my monthly investment newsletter, The Alpha Investor Letter.   And I hold Berkshire in my firm Global Guru Capital’s “American Alpha” investment program. Furthermore, I regularly generate income in my personal portfolio by selling put options on Berkshire, knowing that Buffett will buy back the stock if it ever drops to 120% of book value.

My conviction is simply that U.S. small-cap stocks will continue to outperform large-cap stocks over the coming 10 years — as they always have.

In doing so, I am also assuming that because of its size, Berkshire essentially is a surrogate — albeit a less-volatile one — for the broader U.S. large-cap stock market.

The ever-reliable ‘small-cap effect’