Has investing with the Prophet become unprofitable?

CNBC's Fast Money show had a bracket stock challenge several months ago. It was structured just like the NCAA basketball playoffs where teams, or in this case stocks, are matched up against each other. The number one seed this year as in last year's competition was Berkshire-Hathaway (BRK). In the initial round, the number one seeds are always pitted against the bottom seeded teams; in this case, Berkshire was paired against Ambac Financial (ABK). Of course, everyone on the show picked Berkshire saying the selection was a no-brainer, but I picked Ambac. I do admit to having a stubborn streak but I'm not a die-hard contrarian. I prefer to take the rational approach and actually look at the stock charts and check out the fundamentals. Although Ambac has been hit hard by the credit crisis and its chart just plain sucks (that's the technical financial term), my feeling is that if and when the credit crisis eases, Ambac has no where to go but up. Just last year it was trading in the $90 range. Today it's at two bucks. Unless it goes out of business, the stock doesn't have much downside left, although I certainly wouldn't buy it at this level--not until it and the rest of the banking and brokerage sector shows signs of resuscitation.

That's my justification for Ambac. There are a lot of “ifs” that need to be answered on this one, but for me, there are no “ifs” about Berkshire. That stock is heading down. I'll prove it to you. Here's the chart of the class A stock (BRK.A). (The class B stock chart is nearly identical but the stock trades around $4000/share, making it more “affordable” for the average investor.)

The chart shows the areas of support. If you're familiar with Fibonnaci levels, then you'll see that these levels correspond to them (except the 140,000 level). The stock has broken three support levels in just the past six months. It's been trying to break through it's newly formed upper level resistance at 135,000, but it hasn't been able to do so on the past three attempts. The stock is heading back down towards its key support level of 120,000 and if it breaks through that, I'm betting a free-fall to the 110,000 level. And after that, there's nothing stopping it from going to 90,000.

This is the technical picture. The fundamental picture is just as unfun. While researching this article, I came across another downbeat-nik who is forecasting a similar fate for Berkshire.* He was actually bold enough to short the stock in his simulated portfolio, and while I say that with a hint of cheekiness, I completely agree with his arguments. In essence, he says that the Oracle of Omaha is aging, bringing into question his judgment as well as his successor. But the real reason the author claims that the company has been underperforming is because of increased competition. Buffett is getting beaten at his own game and the company hasn't been getting the bargain basement prices like it used to.

You see why I chose Ambac?

*”It's time to bet against Buffett,” by Rick Aristotle Munarriz for The Motley Fool. (5/22/08)
Link: http://articles.moneycentral.msn.com/Investing/Extra/TimeToBetAgainstBuffett.aspx