Would I buy shares in Warren Buffet’s company – Berkshire Hathaway?

While this might be controversial, there are several issues I see with investing in Berkshire Hathaway (BRK-A, BRK-B), that would stop me from buying shares. While I’m a great admirer of Warren Buffett and Charlie Munger, as an investor, I want to know when and how I will receive a return on my investment. There’s not much point in investing in something, if you can’t envision the end game. At some point as an investor, you either want to be able to sell the investment and make a profit, or you want to receive a return along the way (usually in the form of dividends).

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The Australian stock markets mid-year sale

Thanks to the recent falls in the share market, there are many stocks trading at what I think are bargain prices. When you see headlines like “$33 Billion wiped from Australian share market” and “Australian market loses $33 billion in one day”, its time to go bargain hunting. The stock market is irrational and many companies’ share prices have been savaged for no apparent reason. While it can be hard to think of this news as good, as an intelligent value investor, you should welcome the news. It’s an opportunity to buy those stocks you covet at cheap prices. As Warren Buffett has been quoted a million times “Be greedy when others are fearful, and fearful when others are greedy”. At the moment, I think there is a lot of fear in the market, which is a good time for us.

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Technical Analysis

You might’ve heard of Bollinger bands, stop losses, trading on momentum, timing the market, head and shoulders, moving averages, candlestick charting, lines of support, resistance  and double tops. And what exactly are they? They are all terms used in technical analysis, which is a means of trying to determine future price trends and patterns of stock prices using charts of historical stock price and volume data. Obviously the aim is to predict with a certain amount of certainty, the future level of a stock’s price, and then to take advantage of that by trading on that knowledge.

Now I’ve heard of so called technical analysts outperforming the market, but I’ve yet to hear about the technical analyst equivalent of Warren Buffett, the world’s greatest investor. So where are all the wealthy technical analysts? Who’s the most famous technical analyst? Do they have a high profile?

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Why stockbrokers will never understand value investing

Sometimes I read an article that just makes me mad. There was an article in the Brisbane times on 19th Mar 2010 that made me just shake my head – link is below.
http://www.brisbanetimes.com.au/business/theres-only-one-warren-buffett-20100319-qm5d.html

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Beware of analyst bias

If you receive research from a company that has a stockbroking arm, beware of the potential for bias.  While all brokers say they have Chinese walls setup between their Equity Research and Investment banking businesses, at the end of the day, its the same company. Research can affect the investment banking side of the business. Also beware of the following issues.

  1. Brokers make money when you trade as they don’t charge for their research (depending on how much brokerage you give them of course), so research analysts are encouraged to make Buy/Sell recommendations rather than Hold recommendations. If they ranked all stocks as hold, no one would buy or sell, and they wouldn’t make any money.
  2. Analysts don’t like to upset companies by issuing negative research or sell recommendations. This can have adverse consequences with the company choosing to take their business with other brokers and/or cutting the analyst off from access to the company.
  3. By issuing favourable research, it can mean that companies bring more business to the broker and give the analyst wider access to company resources e.g. the company may decide to issue shares, and pick this particular broker to underwrite the issue or provide advice.
  4. Analysts also don’t like to upset fund managers, (who are their major clients), by issuing negative research that could have a negative impact on a fund manager’s shareholdings.
  5. Analysts are usually restricted from reporting on companies for which another part of the brokerage is doing business. This may mean that an analyst’s last research is outdated, or the analyst’s view could change, but you might not know about it for some time.
  6. Analysts are rarely assessed and paid based on their accuracy of recommendations, but rather by the amount of brokerage they bring in.
  7. Many analysts are students of Efficient Market Hypothesis (Efficient-market hypothesis – Wikipedia). This basically states that market prices reflect all known information, and as such its impossible to outperform the market.  Analysts also use CAPM (Capital asset pricing model) to value stocks. CAPM has many failings, but the major failing is that it uses a component called “Beta” to identify the risk of an asset. Beta is calculated by the variance in a stock’s price compared to the whole market. How you can use a stock’s price  to calculate how risky the company is seems ridiculous to me.
  8. Many analysts use Excel spreadsheets to model companies financial data and to calculate their forecasts. The issue is that as more and more variables are added, tiny errors can compound into massive errors and the end result could be wildly wrong. as Warren says “Its better to be roughly right, than precisely wrong”.
  9. Many fund managers rely on “consensus” data. That is to say, they rely on the average forecast of many analysts. However, if an analyst provides forecasts that are very different to consensus, there is pressure to “adapt” their forecasts back inline with consensus.

In summary, be very careful of forecasts and recommendations that are provided by broker’s research analysts. It would be better to pay for your research from an independent research provider. You still want to be careful here, as there may be unseen bias e.g. links to companies.

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