Technical Analysis doesn't work AT ALL

[npg]

Just wait and see how useful the 3 tools are going to be once the Oil price shoots to 150$ a barrel and interests rates move towards double digit figures.

Better look at your investments at a P/E of 10 - 15, because that's where the sentiment will be... if you are lucky.

It may be some time well spend thinking about why guys like Warren Buffet all of a sudden made such a u-turn.

[icedmetal]

Originally Posted by npg

It may be some time well spend thinking about why guys like Warren Buffet all of a sudden made such a u-turn.

Can you elaborate on this? I'm not sure what you're referring to.

[npg]

The question to ask is:

Why does warren buffet suddenly buy into oil companies (COP, PTR) and high maintenance railway companies who have a commoditized business (BNI, USC, UNP)?

This is pretty much a u-turn on what he previously advocated and thought. He realised (like many) something pretty important.

The interesting thing is: nobody wants to hear it. It is not something people want to hear or believe.

[Lois]

Someone who was at the annual meeting for Berkshire Hathaway stated some interesting facts that Buffet said. One of the questions was how would he handle his investments if he only had $10,000 or so to work with. He said he would handle investments totally different. Right now he is buying companies. He didn't get into detail about investing with small amounts but it would not be the same as he is doing now. If I find it again, I'll try to send it as an attachment unless it's copyrighted.

[npg]

He has to make investments in 'gorillas'. Ie companies with huge market cap in order to move the BRK intrinsic value by a significant factor, using a focused portfoloio.

Great if you could forward that stuff nevertheless. I'd stick it in the recommended reading section ;)

What I am on about, however, is the kind of investments he makes. Ie the sort of sectors and the kind of companies he usually shunned. All of a sudden this has changed dramatically. Something is up, and I have a hintch what it may be...

[lee810]

Originally Posted by Lois

Someone who was at the annual meeting for Berkshire Hathaway stated some interesting facts that Buffet said. One of the questions was how would he handle his investments if he only had $10,000 or so to work with. He said he would handle investments totally different. Right now he is buying companies. He didn't get into detail about investing with small amounts but it would not be the same as he is doing now. If I find it again, I'll try to send it as an attachment unless it's copyrighted.

I think that the problem that Buffet has now is that he needs to move so much money around that if he were to find an undervalued company, by the time he got done buying 10% of it, the market would have responded and it would be overvalued by the time he was done. This was a real eye opener to me, that the number of shares that are traded of each stock are fairly consistent from day to day; it's when someone tries to get more than a few % of the company that it can dramatically influence the stock price, bringing that bargain price up to much closer to the sticker price very quickly. The same principle applies in reverse too, that you can lose a lot of money trying to unload a few % of a company in a short time.

Of course, he could buy a smaller portion of each company, but from my own research looking around for MOS-priced bargain stock, there just may not be that many to choose from at any given time.

-Lee

[spectragroup]

Remember Rule #1 is: "Don't Lose Money". The only thing I've found the technical indicators are good for is to keep you from losing serious money when a stock takes a serious fall. And even in that case, a trailing stop might do the trick better. Buy & Hold is your best bet!

[Rooster]

Originally Posted by npg

What I am on about, however, is the kind of investments he makes. Ie the sort of sectors and the kind of companies he usually shunned. All of a sudden this has changed dramatically. Something is up, and I have a hintch what it may be...

O.K., I'll bite. What's your hintch?

[npg]

The guys is actually an insurer at heart. He needs to evaluate all sorts of risks on a daily basis. This has a big impact on how he invests.

The world is changing. Especially our economy. Things we took for granted are set to become increasingly scarce. Oil.

Times reporter Bryan Appleyard wrote the following:

Oil is running out; the climate is changing at a potentially catastrophic rate; wars over scarce resources are brewing; finally, most shocking of all, we don't seem to be having enough ideas about how to fix any of these things.

Almost daily, new evidence is emerging that progress can no longer be taken for granted, that a new Dark Age is lying in wait for ourselves and our children . . . growth may be coming to an end. Since our entire financial order — interest rates, pension funds, insurance, stock markets — is predicated on growth, the social and economic consequences may be cataclysmic.

Oil is key for our economy. The entire western standard of living is build on top of this readily available engery (1 barrel of oil = 25,000 man hours of energy). It goes without saying that Warren had to think and make up his mind about the peak-oil theory.

I reckon he gives peak-oil a big chance of being right. Many oil fields have peaked already, some of them are already empty. The easy oil is about to run out. It is going to get far more expensive to explore it in the future.

The worlds 2nd largest oil producer insists on nuclear power. Why? Because they too know that they will run out soon. Their reserves and output are dwindling.

Add to the equation that global demand outstips supply.

I am not surprised that warren invested in COP as a hedge. It's the sensible thing to do. Just look at the P/E of the oil companies. It's ridicolously low. That may change. Just work out the price of COP when the P/E is 20 or even in the 30's. If events play themselves out just partially as anticipated, oil stocks can easily trade at valuations close to .com days where 200x earnigs was nothing unusual. Here is a little example. BP has just secured drilling rights in Lybia (now there is a good reason to forgive what happened in Lockerbie). It's EPS is 6.48 with a P/E of (only) 10.33. That makes it 66.94$. If sentiment swings and more people plough into this one and people believe they have a prospect like Apple and value it at 40x earnings, that makes it 259$. Lets say this whole thing goes completely loolapaloza and peak oil is right, a P/E of say 100 (and thats far less than AOL was valued back then) makes it 648$. And I am being sensible here. These calculations only account for change in sentiment and assume 0% growth in earnings. Now, as the price of oil shoots up to say 150$ a barrel (or beyond), the impact on earnings is considerable.

It is becoming painstakingly obvious that oil is going to become more expensive. There is no doubt. So we need to look into alternatives. We don't have enough uranium either. We cannot simply say lets build nuclear power stations everywhere and at least some of the energy supply is safe. There is not enough of that stuff to go around to supply the world.

So what's it going to be then?

Good ol' coal is coming back.

And what you need for a coal industry?

Railways.

And which railway already transports most of it?

BNI.

If there is a chance of this event becoming reality in our immediate lifetime, then you will need the railway for more than transporting heavy goods. It will be the only efficient method of transport left.

I am not on the side of the doomsayers, but this scenario is too big not to think about. In the least, I suggest considering this scenario as a reason for Warrens latest interest in oil and railways.

The Rainwater Prophecy - December 26, 2005
Peak Oil: Life After the Oil Crash

And for the Cramer fans here, there is this report:

Still, the move seems bound to raise some eyebrows, particularly after Buffett's longtime sidekick, Charles Munger, made some controversial comments at the recent Wesco Financial (WSC:NYSE - commentary - research - Cramer's Take) conference. He suggested that future generations will curse present-day Americans for consuming fossil fuels at such a high rate, since the supply of oil will be greatly diminished.

"Those were pretty strong words," says Tongue's partner at T2 Capital, Whitney Tilson. "You rarely see Buffett and Munger investing in something that's just had its biggest run in history in the last five years, [like the oil and gas market] . One reason may be that they believe oil prices are going to be high, if not higher, for a long time."

In fact, both Buffet and Munger have worked out that Peak Oil is a reality unfolding right now.

Fasten your seat belts, I'm going long on VLO and COP.

[SeanieT]

Originally Posted by lee810

That's a good question. Although Whole Foods (WFMI) figured prominently in the Rule#1 book, I've noticed that its equity growth went flat from 2005 to 2006. That will take the MOS price from whatever it was down to near 0, particularly if you're using a conservative estimate, like the spreadsheet does. Looking at the stock price, it's been on a decline over the past year (down nearly 30%) while the S&P is up 20%.

I don't know if this is an example of technical analysis not working, or if it's a case of having a bad stock to work with. Even the 50-day moving average is so smooth in its decline that it looks just like a straight line downward except for a 2 month period around last November. With technical analysis, you still need to have a stock price that moves up and down to get in and out of with some profits, whereas the WFMI stock has been more of a slow steady slide and so it may not be a good stock to use as an example of how technical trading works or doesn't work.

I believe that the technical analysis part of Rule#1 investing is just to let you know when to get out of a stock after the MOS calculator has told you gone near or above sticker price. If you want to do purely technical trading, then that sort of violates the fundamentals of Rule#1, i.e., buying value stocks to begin with.

-Lee

You know you may be right.