Buffett Bear, Doug Kass, Adds Spice to Meeting as Rally Lulls Investors; Kass, 64, has shorted Berkshire stock in a bet the price will fall

Kass, Berkshire’s Bear, is ready to “surprise” Buffett

1:25am EDT

By Jennifer Ablan and Jonathan Stempel

(Reuters) – Hedge fund trader Doug Kass had his first brush with fame at the age of 10, when he appeared on a television quiz show, Tic-Tac-Dough, and won every day for a week.

More than five decades later, Kass might find another sort of celebrity this Saturday when he will have the opportunity to quiz billionaire investor Warren Buffett at Berkshire Hathaway Inc’s annual meeting in Omaha, Nebraska. Buffett in March handpicked Kass, founder of hedge fund Seabreeze Partners Management Inc, to be Berkshire’s first “credentialed bear” to attend the meeting, and “spice things up. Kass, 64, has shorted Berkshire stock in a bet the price will fall. He is one of three members of an analyst panel that, along with shareholders and journalists, gets to question Buffett and Berkshire Vice Chairman Charlie Munger for five hours at the meeting, which draws more than 35,000 people to Omaha each year. “I had a lot of fun going to the Woodstock music festival on Max Yasgur’s farm in Bethel, New York in August 1969. I expect to have almost as much fun – and remember it – going to the Woodstock of Capitalism in Omaha,” Kass said in an interview. He declined to disclose the size of his Berkshire short, but called it an “average-sized position” that he initiated only a few days before Buffett’s invitation. Kass is known for his maverick positions, and his stock picks and pans have been followed widely by virtue of his prolific writings for TheStreet.com. He has a column – at one time called “The Contrarian” – to discuss neglected or undervalued stocks and sectors that he calls “purchase candidates,” as well as fully exploited or overvalued investments that he thinks are worth selling short. In April, Kass told clients and readers that he was bearish on economic growth and stocks.

“I maintain an out-of-consensus view that a recession in the U.S. by 2014 holds about a 50 percent probability,” said Kass, who added that he was shorting equities.

Kass grew up in Long Island, New York and says he learned the stock market from his grandmother.

“My Grandma Koufax taught me the stock market when I was 15 years old,” he said. “I spent my vacations as a teenager ‘watching the tape’ in a small brokerage firm in Rockville Centre, Long Island. I bought my first stock, Teledyne, in 1967.”

His childhood nickname was “The Professor” because he had top grades in school. After majoring in philosophy and religion at Alfred University, while avidly participating in the 1970s “make love not war” peace movement, Kass took his first job working with American political activist Ralph Nader.

Kass began his investment career as a housing analyst at the investment bank Kidder Peabody in 1972. He later worked for the billionaire investor Leon Cooperman, who runs the hedge fund Omega Advisors. Kass founded Seabreeze in 1997.

“He’s bright, thoughtful, analytical – and maybe he tends to the dark side a little bit too much,” Cooperman said in a telephone interview. “At times the consensus is right, at times the consensus is wrong. And I think he relishes being out of consensus.”

HATE MAIL OVER AOL

Kass said the toughest criticism he ever faced as a short-seller was in late 1999, when he trashed Time Warner’s $112.1 billion merger with AOL. He called it overpriced, with “no synergies between the two companies and weak earnings prospects.

“There were a lot of nasty emails and (institutional investors) were interviewed and attacked my position” in the press, Kass recalled.

He was proven right. The merger never met expectations, and the combined company’s stock price sank from $65 into the single digits. Time Warner Inc spun off AOL Inc in 2009, a transaction valuing the latter at less than $3 billion.

“It is widely regarded as a seminal deal at the end of the Internet boom and a huge mistake – perhaps one of the worst M&A deals in history,” Kass said.

He has also had his share of wrong calls. Kass said his worst short bet was against Amazon.com Inc shares 15 years ago.

“It was a bad, bad loss,” he said, but did not give details.

Kass has also this year bet against U.S. Treasuries, considering it “the trade of the decade.”

But it hasn’t worked out so far, as 10-year Treasury yields have plunged amid concerns about global economic growth, falling below 1.65 percent this week from over 2 percent in mid-March.

Since being chosen as Berkshire’s bear in March, Kass says he has not communicated with Buffett or Munger, and he does not want to give them any hints on what issues he plans to raise.

“I want it to be a surprise and I don’t want Mr. Buffett to consider the questions until the meeting,” Kass said.

He has previously raised red flags over Berkshire’s large size and Buffett’s advanced age of 82, saying it will be difficult to replace “the single greatest stock investor of all time.”

Kass said he is not nervous about challenging Buffett in front of his most ardent supporters, but said this weekend could prove “the craziest thing” he has ever done.

He will certainly be better prepared than he was for one question on Tic-Tac-Dough.

Kass recalls one live broadcast where he was asked to name the holiday that falls on the Sunday before Easter, and was given a hint by host Jack Barry that it was the name of a tree.

“Dogwood Sunday,” Kass answered.

“Doug, I am sorry,” Barry replied, according to Kass. “The correct answer is Palm Sunday. Haven’t you ever heard of Palm Sunday?

“No, Mr. Barry. I never heard of Palm Sunday. I am Jewish.”

Barry, who was also Jewish, fell over laughing into a nearby pyramid of Crest toothpaste boxes set up for a commercial.

Buffett Bear Adds Spice to Meeting as Rally Lulls Investors

Warren Buffett says he’s looking to “spice things up” at the annual meeting of his Berkshire Hathaway Inc. (BRK/A) this week as the company’s 32 percent return in the last year lulls shareholders.

For the first time, the May 4 gathering in Omaha, Nebraska, will feature questions from a money manager betting on the stock’s decline. Doug Kass, selected by Buffett for the role, will challenge the value of a stock that gained twice as much as the Standard & Poor’s 500 Index in the year ended yesterday. Class A shares closed at a record $161,025 on April 25.

Buffett, 82, has had to defend the company he’s led for more than four decades at recent meetings as the stock trailed the equity benchmark and Berkshire’s governance was questioned. Concerns abated this year as investments he made during the financial crisis and takeovers added to earnings. The stock market rally also helped an $87.7 billion equity portfolio.

“His core fan base is going to be very happy and relaxed,” said Jeff Matthews, a Berkshire shareholder and author of books about the billionaire. “Their Merrill Lynch account is probably at an all-time high, including whatever they own beside Berkshire. And Buffett has come out of the financial crisis smelling like a rose.”

Operating profit at Berkshire probably climbed 28 percent to $2,072 a share in the first quarter from a year earlier, according to Meyer Shields, an analyst at Keefe Bruyette & Woods. A rebounding U.S. economy may fuel demand at operating units including railroad Burlington Northern Santa Fe, he said. Berkshire is expected to report results May 3.

‘Complete Picture’

Having a skeptical view at the meeting is important because Buffett has been repurchasing shares, said Tom Russo, a partner at Berkshire investor Gardner Russo & Gardner. Buffett’s firm said in December that it bought about $1.2 billion of its stock from the estate of a longtime shareholder, and boosted the price it’s willing to pay in the future.

Buffett is seeking “to paint a complete picture” so that investors can make an informed decision about whether keep their shares, said Russo.

Adding a bearish perspective may help focus the meeting on topics that matter to investors. Shareholders at the gathering, which has drawn more than 30,000 attendees to Omaha’s CenturyLink Center, have asked Buffett for his views on topics from politics to taxes.

In an interview last week, Kass declined to say why he was betting against Berkshire’s stock now. Buffett selected him after calling for candidates in a March 1 letter to investors that explained logistics for the annual meeting.

‘Credentialed Bear’

“To spice things up — we would like to add to the panel a credentialed bear on Berkshire,” Buffett wrote.

Buffett may field questions at the meeting about the deal announced today to buy the 20 percent stake in Israel’s IMC Metalworking Cos. that Berkshire didn’t already own for $2.05 billion. Since Berkshire took control of the toolmaker in 2006, it expanded operations through acquisitions and increased its staff. Buffett said in a March letter to shareholders that he considers the business, also known as Iscar, one of Berkshire’s “powerhouse five” non-insurance operations.

The billionaire’s deal with Jorge Paulo Lemann’s 3G Capital this year to take ketchup maker HJ Heinz Co. (HNZ) private may also get attention at the May 4 gathering. The transaction, approved yesterday by Heinz shareholders, will give Berkshire half the common equity in a new holding company and an $8 billion preferred stake paying a 9 percent dividend.

BofA Warrants

The deal will lift investment income already bolstered by a bet Buffett made on Bank of America Corp. (BAC) in 2011. Berkshire collects a 6 percent dividend on the $5 billion preferred stake and got warrants to buy 700 million of the lender’s shares at $7.14 each. Bank of America closed yesterday at $12.31, giving the contracts a paper profit of about $3.6 billion.

Shareholders may also ask about Buffett’s deal with Goldman Sachs Group Inc. in March to unwind a $5 billion investment made at the height of the crisis. The agreement will make Berkshire one of the bank’s largest shareholders at no additional cost.

At the 2010 meeting, Buffett defended Goldman Sachs, then under scrutiny over allegations it misled clients prior to the U.S. housing-market collapse. The bank later settled with the U.S. Securities and Exchange Commission for $550 million without admitting wrongdoing. It did acknowledge making a “mistake” and using marketing materials with incomplete information.

Buffett has had to field other tough questions at the meetings. In 2007, his investment in PetroChina Co. sparked protests because the oil company did business in Sudan, where the government had been accused of supporting genocide.

Succession Planning

Four years later, he was questioned about his praise for David Sokol, a lieutenant who stepped down after buying stock in Lubrizol Corp. while recommending that Buffett take over the chemical maker. Berkshire’s board said in a report before the 2011 meeting that the manager broke company trading rules.

Sokol was once considered a candidate to succeed Buffett as CEO. The SEC ended a probe without taking enforcement action, Sokol’s lawyer said this year.

Buffett said in February of last year that the board had agreed on a candidate to fill the CEO role once he’s gone, without identifying the individual. Two months later he said he was diagnosed with stage 1 prostate cancer. He completed treatment in September.

Kass has identified succession as a challenge for the company. In a 2008 article on TheStreet.com, the investor cited the difficulty of replacing Buffett among reasons for betting that Berkshire stock will decline. He also cited the risk of losses on derivatives.

‘Tough Job’

The article appeared on March 10, 2008, when the shares closed at $131,400. They dropped below $71,000 in March 2009 amid a global economic slump as liabilities on the derivative contracts climbed.

Kass may have a hard time making his case at the meeting to shareholders who see the value that Buffett has created, said James Armstrong, president of Henry H. Armstrong Associates, a Pittsburgh-based investment manager that oversees about $400 million, including Berkshire shares.

“It is a tough job to be a bear on Berkshire at this point, because the company is such a treasure chest of assets and earnings streams, trading at such a bargain stock price,” he said. “You have to be willing to ignore the mathematics.”

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net.