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Yola Edwards

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Slow and steady wins this race

Yola Edwards

 

Holding a stock for the long-term necessitates finding one that is a leader in its industry, has brand recognition, a strong balance sheet, growing sales, substantial cash flow, successful skilled management teams and a reasonable stock price. Perhaps a tall order but isn't that a part of Warren Buffett's investment strategy? In addition he looks for easy to understand businesses and high return on equity, meaning they don't require a lot of capital. He snaps up shares in undervalued companies with low overhead costs, high growth potential and low price-to-earning ratios. Then he waits for the rest of the world to catch up. Buffett's time tested strategy works. He does not pay attention to stock market predictions or fluctuations, nor macroeconomics nor Wall Street fashions. Instead, he sticks to his long-term investing plan. As long as a firm's fundamentals do not change, Buffett will not sell, even in times of economic crisis.

Although critics predicted an end to his success when he didn't invest in the fashionable high-tech sector, his conservative investment style saved him from the 2000 dotcom crash. He stated at the time of the surging dotcom era that he didn't understand the high-tech sector or more importantly the values investors placed on the stocks and he wasn't going to invest in that sector. It's interesting to note that he and Bill Gates are great friends and that he was able to stay his course and not be influenced by Gates's world.

Buffett bought control of Berkshire Hathaway in 1965. If you had invested $10,000 (U.S.) then you would have more than $50-million today, compared to just under $500,000 had you invested in the Standard & Poor's 500 stock index at the same time.

Berkshire Hathaway Inc. is a holding company primarily involved in the property and casualty insurance business but also has holdings in publishing, manufacturing of confectionery products, cleaning systems, footwear and furnishings retailing.

Notes from Warren Buffett explain the classes of common stock as follows: "Berkshire Hathaway Inc. has two classes of common stock designated Class A and Class B. A share of Class B common stock has the rights of 1/30th of a share of Class A common stock except that a Class B share has 1/200th of the voting rights of a Class A share (rather than 1/30th of the vote). Each share of a Class A common stock is convertible at any time, at the holder's option, into 30 shares of Class B common stock. This conversion privilege does not extend in the opposite direction. That is, holders of Class B shares are not able to convert them into Class A shares. Both Class A & B shareholders are entitled to attend the Berkshire Hathaway Annual Meeting which is held the first Saturday in May.

The Class B can never sell for anything more than a tiny fraction above 1/30th of the price of A. When it rises above 1/30th, arbitrage takes place in which someone -- perhaps the NYSE specialist -- buys the A and converts it into B. This pushes the prices back into a 1:30 ratio.

On the other hand, the B can sell for less than 1/30th the price of the A since conversion doesn't go in the reverse direction. All of this was spelled out in the prospectus that accompanied the issuance of the Class B shares.

When there is more demand for the B (relative to supply) than for the A, the B will sell at roughly 1/30th of the price of A. When there's a lesser demand, it will fall to a discount."

The stock trades at $3611 with a 14.79 P/E while the S&P 500 at 1,514 trades at a P/E of 18.16.

TSX

A technical analysis review of the class "B" shares indicates that the stock has sold off 5.5 per cent since its December 2006 all-time high of $3825 and has basically trended sideways to alleviate the overbought condition. Though the weekly MACD is still issuing a sell signal, it is trending into oversold territory. The past week ending June 29, the stock reached the lower oversold Bollinger band and bounced off of it. The narrowing Bollinger bands, the ability for the stock to bounce off of the lower band and the fact that the MACD is trending into oversold territory without further stock price erosion suggests the consolidation may be nearing an end although a four month window of sideways action may still exist. The stock appears to be in a fourth wave correction of a subdivided third wave. A close above $3700 would suggest a resumption of the rally with the fifth wave of the larger third wave likely rallying to about $4,600 over the next year. However, it appears that the fifth intermediate wave will rally to about $5800 over the following two years for a total anticipated three-year return of about 61 per cent.

Perhaps that seems a conservative three-year return in light of some other possible opportunities, but Buffett's track record has been consistent and dependable and his council is long sought after as attested to by the latest successful $650,100 bid to have lunch with Warren Buffett. Why wouldn't you want to invest with him?

Yola Edwards is a contributing writer and technical analyst for Bell Globemedia Interactive, providing options and technical analysis research on a variety of North American equities.

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