Technical Take on Warren Buffett
By Pat Dorsey, Wednesday October 17, 2001, 7:00 am Eastern Time
I have relatively little respect for technical analysis in the best of times, but a recent conversation reminded me once again why investing based solely on stock charts is such bunk.
After giving a speech at an investor conference in late September, I was asked by an audience member what I thought of Berkshire Hathaway BRK.B in the wake of the World Trade Center attacks. I replied that it looked moderately undervalued, since the short-term effects on Berkshire's holdings would likely be offset by stronger long-term results from Berkshire's insurance business. (The short version of this thesis is simply that the pricing environment for reinsurance is likely to improve, which will help Berkshire's GenRe subsidiary.) At the time, Berkshire B shares were trading at around $2,100, and I opined that fair value was probably closer to $2,400 or $2,500.
As I was finishing my answer, someone in the front row piped up with, ``Actually, Berkshire is only worth about $1700.'' Intrigued, I asked him how he'd arrived at that number. Since valuing Berkshire Hathaway is tough at best, I was very interested in hearing how he arrived at a per-share value so radically different from mine.
His answer: ``It's easy. The stock's had a monster run since March of last year and the stock shows a basing pattern around $1,700. This is confirmed by looking at the stochastics as well as the stock's moving average.''
I was speechless. Investing in Berkshire Hathaway based on its chart? Warren Buffet must be rolling over in his La-Z-Boy in Omaha. In any case, I mumbled something about differences in opinion being what makes a market, and moved on to the next question.
I was simply too stunned at the absurdity of a technical analysis of Berkshire to give the guy the answer I wanted to, which was, ``Are you mad, man?'' Even if you grant that technical analysis has some limited utility--and to be fair, some academic studies have shown that trading strategies based on stock-price momentum may have some practical value--betting on Berkshire because of its chart is just plain silly.
Here's why. The whole idea behind technical analysis is that charts theoretically tell you when other investors are accumulating or selling a certain stock. If a chart has a ``bullish formation,'' then buyers will supposedly outnumber sellers in the near future, and the stock will rise. However, this only works if other technical analysts are looking at the same chart, and trying to get in ahead of one another. Moreover, technical traders tend to like volatile, highly liquid stocks. The volatility helps them make money in the short term, and the liquidity ensures they can get in and out quickly.
Berkshire fails on both accounts. For one thing, I can't imagine there are more than a few people out there trying to trade it based on the chart. Since charting is in many ways a self-fulfilling prophecy, Berkshire won't rise or fall based on its ``stochastics.'' For another, Berkshire isn't all that volatile and only trades about 100,000 shares per day, which means it's not a very attractive vehicle for traders.
Berkshire is, however, a darned attractive vehicle for investors--attractive enough that I bought a little bit soon after the World Trade Center attacks. And you know what? I didn't even glance at the chart.
Etc. One of the more self-serving things I've seen in a long time is the recent support of a national digital ID card by Messrs. McNealy and Ellison--CEOs of Sun Microsystems SUNW and Oracle ORCL, respectively. Gee, do you think a national identity system would need a huge database running on big servers?
My peripatetic boss, Haywood Kelly, recently returned from a trip to Paris, where he reports that museum workers were (as usual) striking. Their complaint? They're being asked to work 36.5 hours per week instead of the 35 hours mandated by French law. Rough life, huh?