DavidRolfe

Investing is a marathon, not a sprint. No investor nowadays exemplifies that belief more than Warren Buffett, who is unveiling his 50th annual letter full of investing wisdom and advice to shareholders of Berkshire Hathaway stock.

Yet when I think of the five-fold magnitude, and 22-percentage points outperformance of Berkshire BRK.A, +1.10% BRK.B, +1.55%  stock versus the Vanguard Russell 2000 ETF VTWO, +1.62%  over the past 12 months (27.5% vs. 5.0%), memories of Secretariat’s astonishing 31 horse-length margin of victory in the 1973 Belmont Stakes come to mind.

In early March of last year, I challenged Marketwatch columnist Nicholas Vardy to a bet after he wrote an article opining that small-cap U.S. stocks (for which the Russell 2000 Index RUT, +1.72%  is a proxy) were a better long-term investment than Berkshire Hathaway.

What to watch for in Warren Buffetts shareholder letter

WSJs Erik Holm joins MoneyBeat with four key things to look for in Warren Buffetts annual letter to investors. Photo: Getty

In that article a year ago, I wrote that the Russell 2000 was “significantly overvalued” and that small stocks faced major headwinds. Berkshire, meanwhile, was more attractively valued and poised for strong per-share growth.

“Valuation advantage: Berkshire Hathaway. Growth advantage: Berkshire Hathaway,” I noted.

A year later, I still believe that Berkshire Hathaway has both a growth and valuation advantage over the Russell 2000 Index — just not nearly as much as it did then. I expect Berkshire’s 2014 book value to clock in at about $99 per Class B share — a gain of about 10%-11% over 2013. Add to this gain the increase in valuation (price/book of 1.3X to 1.5X) since last March of around 16% and you get the gain in Berkshire shares of about 27% since the start of this contest.

The coming year will likely see stronger headwinds for Berkshire shares. In fact, I would not be surprised if the shares’ performance turns out to be little more than flat over the next 12 months.

On the fundamental front, another gain in book value per share of 10%-11% seems to be a pretty high hurdle. Organic growth, plus the accretive acquisitions of NV Energy, Duracell (batteries), Van Tuyl Group (automotive), the chemistry and drilling fluids business from Weatherford International, Charter Brokerage (petrochemical logistics) and most recently Devlet Louis Motorradvertriebs (motorcycle apparel), certainly puts double-digit per share book value growth in reach.

That said, double-digit gains in book value per share are likely impossible if Berkshire’s $117 billion equity portfolio suffers through any meaningful stock market decline during 2015. (Don’t forget that the Great Bull Market of 2009-2015 will celebrate its sixth-year anniversary in early March.

On the valuation front, headwinds abound too. Recall that Berkshire shares have been on a tear since those uber-cheap days in late 2011. Since year-end 2011, through recent all-time highs, Berkshire shares are up 100% — 35% more than the “piddling” 65% gain in S&P 500 SPX, +1.26%  over the same period. Berkshire’s current price-to-book value of 1.5X is certainly closer to fairer value than back-up-the-truck cheap. The stock is due for a much-deserved rest.

Despite those challenges, relative to the Russell 2000 Index at present, Berkshire still has a modest growth and more-than-modest valuation advantage. The Russell 2000’s price gain of just 5%, plus the single-digit earnings growth of its constituent member companies over the past 12 months, has done little to eradicate its historical outsized valuation at the start of this contest.

In sum, I expect a much closer horse race over the next 12 months — particularly if this Great Bull Market celebrates its seventh birthday in March 2016.

My prediction: Berkshire Hathaway beats the Russell 2000 at the wire — by a nose.

David A. Rolfe is chief investment officer of investment firm Wedgewood Partners, Inc. Berkshire Hathaway Class B stock is the firm’s second-largest portfolio holding.