Should You Sell Buffett’s Berkshire Hathaway?

By | July 14, 2016

Maybe, but not for the reason Ken Goldberg suggests at Goldberg, the subtitle(“Technical analysis makes a case for lightening up on shares of Buffett’s BRK.B stock”) would indicate, is devotee of  divining future stock price movements from the entrails of birds, err, technical analysis. The answer for such a person is a resounding yes- sell Berkshire Hathaway. Technical analysis has repeatedly been shown to lack any validity, where as value investing has consistently outperformed the market in study after study. If you are a practitioner of the former, sell your Berkshire(BRKB). It is not in line with your philosophy.

Goldberg begins his article with obligatory platitudes about Buffett, but, unsurprisingly, gets Buffett’s strategy wrong.

It’s almost sacrilege to dis legendary investor Warren Buffett, the Oracle of Omaha, so we won’t go there, as he has proven that given enough time and resources, buy and hold works. The lesson that can be taken from Warren Buffett’s example of wealth building is “don’t bet the farm.” In other words, always leave move capital than you can imagine you’ll need to make your buy and hold decision work out positively. Warren has even said that the public can’t invest as he does. That’s because he can craft special arrangements with almost everyone that needs his support, capital, or both.

Let’s see, we would like to dis him, but darn it, people would get annoyed and he’s kind of too good. So, do you want to build a strawman? First, we will pejoratively define his strategy as “buy and hold” and, for good measure, point out that it requires “enough time and resources”. But, none of that is important because really the only thing he does is make sure his bets are not leveraged. Keep this point in mind, because we’ll discard it in the next paragraph. No mention here of Buffett’s core strategies of value, of high return on reinvested capital, etc.

True, you can let Buffett invest for you if you buy shares in Berkshire Hathaway , the B shares of his investment vehicle Berkshire Hathaway, but you then have to have the staying power that he has if you want to experience the performance outcome that he does. There’s the rub. Most of us over leverage our plays, eliminating our staying power if things get shaky on a short- to intermediate-term basis. In other words, we buy too much at one price point, thinking we, or even Buffett, know what the lowest price to buy is. Truth is, no one does. That’s why Buffett doesn’t buy stocks, but rather accumulates positions in companies he believes he significantly understands.

You could just go along for the ride with him, but darn it, you’d have to be patient, and not use leverage. You have no self control, so that wouldn’t be possible. Let’s finish up the paragraph by making a meaningless distinction- Buffett does not “buy stocks”, he “accumulates positions in companies”. Now with that all out of the way, we’ll use some impressive sounding voodoo jargon to convince you to follow our senseless strategy.

However, if you want to apply objective decision support to Buffett’s process, you can enhance your experience in his fan club. Our DSE (decision support engine) does just that. One of the ways this works is by taking historical “if/then” conditions and price patterns and anticipating the probabilities of similar outcomes occurring in the future.

We can take Buffett’s wishy-washy subjective stuff and make it objective. Wow, are we good. Our fancy acronym looks at the past and hopes it looks like the future.

For example, without any knowledge of what Buffett is thinking, doing, or saying, we can see that the best time to buy BRK.B is when the monthly stochastics are at or below the 25% level, and holding until stochastics reach above the 90% level. Here at 80%, this is clearly not the place to buy BRK.B, even if they have the potential for a stretch into the DSE’s idealized pink sell box, or red sell bulls eye, which now encompass 160 +/-5. The buy signal was at the Jan/Feb low near 125, as it was in 2011 near 65, and in 2009 near 45. As price approaches the 2014 peak near 150, evidence is mounting for the objective observer to sell to reduce or eliminate long exposure into the 153 +/-3 zone, as it will allow the late-joining bulls that bought the top two years ago to exit at break even, finally, which many will be happy to do. Why? Most investors don’t invest with Buffett to obtain a two-year return of 0%, so will welcome the chance rethink that allocation of capital. In addition, those with technical chops will see the rise off this year’s 125 low as a completed impulsive pattern, and will prudently take profits in anticipation of a correction to buy at lower prices than at all-time highs, after a two year sideways pattern.

“Without any knowledge”- first thing Goldberg’s gotten right. We can use fancy stochastics and pink sell boxes and red sell bulls eyes, if we have “technical chops” But wait, there’s more:

If we use our DSE’s fractal benefits, we can look within these monthly bars to find several measurements of price symmetry, where rallies tend to peak and reverse. One of those is the 149 level, where the upper 2 standard deviation band is now beginning to exert resistance on rising prices. This is because this statistical extreme controls 95% of normality. You can see this olive/gold containment band in the chart above. What isn’t shown is the 3 standard deviation band, controlling 99.7% of normality, which now stands at 155. Betting on prices existing above these stretches of exuberance is believing you can survive and prosper in the last 1-5% of a rally’s lifespan. Few of the best of the best traders on the planet can consistently do that. So, unless you’re one of them, perhaps a different strategy should be considered, like when the objective DSE flashes the next buy signal?

Ooh- “fractal benefits” sounds fancy. And “monthly bars”. “Standard deviations”. This must work, it sounds so self-important and sophisticated.

The message we’ve just received from the DSE’s algorithms, which we just made known to members of our Trading Room and DSE Alerts services is to prepare for the finale of the rally off the 2009 low, and use 137 as the sell stop protection level, while aiming to exit long exposure above 150. For more detailed analysis of this and dozens of other opportunities, be our guest for a two week trial, and consider our upcoming workshop in Los Angeles, beginning Friday July 22nd.

What’s that? You don’t actually own the stock, ad this whole advertisement, I mean, article, was to promote your astrological training. Oh. Maybe it’s not time to sell Berkshire Hathaway after all.

Disclosure: The author owns shares of BRKB

Leave a Reply

Your email address will not be published. Required fields are marked *