Betting with Buffett: Berkshire stock is risky, but it's a buy

— -- A: Investors worried about the economy have had one main safe haven: U.S. government debt.

Short of that, investors have had a tough time finding places to hide. Some, at least, are looking to famous investor Warren Buffett for a bit of shelter.

While the Standard & Poor's 500 stock index is down 40% this year, shares of Buffett's Berkshire Hathaway are down 33%. Not too big a difference. And the difference between the S&P 500 is even closer, because the S&P has a roughly 3% dividend yield while Berkshire pays no dividend.

Still, the Oracle of Omaha is outperforming the market. Before we subject the stock to the four-step Ask Matt test, I would like to express some caution. Remember that Berkshire stock is a bit like a closed-end mutual fund. The company, Berkshire, owns a number of businesses and assets, and investors value those assets.

The resulting prices set the price of Berkshire stock. And remember, the price doesn't reflect the value of the assets, per se, but rather how much investors are willing to pay for them. I've wondered if investors have gotten so scared, and the hype about Buffett so great, that investors are overpaying for Berkshire assets out of fear. But only time will tell.

Meanwhile, let's put the stock through the four tests. I'll use Berkshire's more expensive class A shares, since more data are available, but the purchase decision is essentially the same if you're considering the less costly B shares.

Step 1: Risk vs. reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Downloading Berkshire's trading history back to 1980, we see the company generated an average annual compound price appreciation of 21.8%. This is an outstanding return, while the S&P 500 posted an 10.6% return in the same time frame, says IFA.com.

But, here's the catch. To get the higher return you accepted higher risk — standard deviation — of 30.1 percentage points. That's much higher than the 15.3 percentage point risk of the S&P 500 during the period. But you're getting a decent return on that extra risk. For the 97% greater risk, you're getting a 106% higher return. Few stocks pass this test, and actually generate excess returns. You could probably get a higher return for that much risk with another investment, but at least you're getting something. So far so good.