In its recent end-of-quarter filing, Berkshire Hathaway reduced its stake in Johnson & Johnson by 54%. As is often the case, the media automatically assumed that Buffett turned sour on Johnson & Johnson and was dumping the stock. Before you run off and sell 50% of your JNJ stake because Buffett is allegedly dumping his year-and-a-half old investment in the company, let’s look at the sale logically.
I’m going to quickly run through the latest filing so that you can ignore the noise going forward. First, let’s look at the “reporting entities” in the filing. For Berkshire, there are 21 reporting entities on this filing which means that holdings listed on the 13F-HR include decisions made by…and not made by…Warren Buffett.
If you actually look at the filing, you’ll see the list of entities reporting in this filing. Buffett. Blue Chip Stamps. GEICO. Wesco. And a number of other entities, some of which have their own investment managers, portfolios, and decisions.
Later in the filing, where the positions are reported, Column 7 itemizes the “Other Managers” – the entities or people that were involved in making the decision to hold those securities. As Chairman of Berkshire, Buffett is listed on every position. Beyond that, the positions are reported in groups based on who made decisions and/or holds the position.
When Buffett Moves Money, He Moves Money
Rather than immediately assuming that Warren Buffett is shedding his Johnson & Johnson position, let’s see the changes to the portfolio based on the “Other Managers” and entities that hold the stock:
What we see here is that National Indemnity, OBH Inc, BH Columbia, and Columbia Insurance reduced their stakes in Johnson & Johnson. Other entities directly controlled by Buffett and Munger – for example, Berkshire Hathaway itself and Wesco Financial and subsidiaries – did not sell a single share of JNJ.
When Buffett is buying or selling stock, he typically does so in bits and pieces through various entities in an attempt to mask his purchases and sales for a while. In this case, large sales were made by a few insurance subsidiaries rather than a “sneaking in or out” move.
Did Buffett Sell Johnson & Johnson?
Maybe. Maybe not. Time will tell as we won’t see another 13F-HR for three months. Still, I think it’s premature to say that Buffett is dumping Johnson & Johnson based solely on the amount of shares controlled, directly and indirectly, by Berkshire Hathaway, especially when some of the entities he directly controls with little or no outside influence did not sell a single share in the last quarter.
Regardless of what Buffett did or didn’t do, buying or selling JNJ based on his 13F-HR or the noise in the media is a poor investment strategy. If you want to do that, buy Berkshire Hathaway stock and put it on the shelf.
Filed under: Companies Analyzed (Generals)
Related Stocks: JNJ
I for one have never understood why you would imitate anyone. I read all I can about Buffett and value investment, but then I think about it and try to figure out if it a) makes sense at all, b) makes sense at THIS particular time and c) makes sense for me. For example, someone mentioned that they were afraid of GLW because they had once almost gone bankrupt and he read somewhere that this fact is the kiss of death for a value investor according to some famous (Buffett?, Graham?) guru. This makes absolutely no sense to me at any time. What happened twenty, ten or even five years ago is relevant only if the same people and the same practices continue running the company, if the same DNA runs through it’s corporate veins. An example of whether the model applies this time would be buggy whips in the car age or BANKS in the coming age of banks-as-utilities. Finally, what is good for Warren Buffett is probably not nearly as good and maybe even bad for me.
There are many, many Buffett aphorisms, some contradictory (at least on the surface) and we can all pick and choose which ones we want to emphasize to support our investment decisions. I for one, always try to challenge those most near and dear to me in an effort to not drink my own kool-aid.
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My two cents,
Why do people pay so much attention to what WEB is buying or selling anyway(well, the media does because people do, I understand that well enough). But really, the name of the game is to fully understand the value investing philosophy and then start applying it in your own way.
Don’t get me wrong, he is the best to ever do it and I’m all for reverse engineering his investments as an exercise to sharpen you valuation skills. But beyond that, it seems to be a waste of time to get involved so deeply. I mean if you don’t have his circle of competence (who does?), then why concern yourself with his moves. What I’m saying is it’s all noise just like Joe and others have said.
Anyway, just wanted to say that, if anyone needs me I’ll be looking for dirt cheap stocks.
Cheers.
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At the same time, Buffett spent his early investing career riding the coattails of other investors. While one may not want to match Buffett’s moves completely, his experience, particularly his early experience shows how copy-catting a more experienced investor can be useful.
I don’t think that people who are serious about investing should ever strictly imitate someone else’s investments. On the other hand, just because you don’t blindly follow someone, doesn’t mean you can’t learn something from their style, and it would be foolish to disregard why other people might be ditching a stock. For every buyer of stock there is also a seller, and you need to have good reason to think you know more than the guy on the other side of the trade. And if Buffett is the one selling (given his preferred holding period of forever), then I’d take special note.
Buffett sold off half his stake in Bank of America this past summer, just before the banking crisis. He has a 50 year investing record that has very few blemishes. Personally, I didn’t buy JNJ stock for my portfolio. But if Buffett sold off a significant portion of one of my holdings, I’d spend a few minutes thinking about whether I had my money in the right place. I wouldn’t necessarily follow him out, but I’d definitely think about it.
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So far, it sounds like we are all wise, disinterested, smart investors who can relatively quickly dismiss the Oracle and his doings.
I’ll state this simply, but don’t think me a brute. Let’s assume that Buffett DID sell J&J. Why would one of the best capital allocators sell? Business broken? Management worrisome? Future uncertain? We don’t yet know, but what we do know is that Buffett has found a better place to put capital.
That is a big deal and important news to me. It gives me a rough sense about what returns I should be seeking for my investments (because I have a rough intrinsic value of J&J charted out), and what asset classes to consider. Buffett has been buying more bonds than equities. That is a big deal for helping me frame my picture of current investing options.
We’re all macho and independent, tis true. But this does strike me as big and important news.
(Ok, let me have it…)
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I’m not saying that it wouldn’t work out for investors. A number of studies (as you mention) show that following Buffett’s filings would have been quite lucrative. But I think that Jason hit the nail on the head with his comment:
…the name of the game is to fully understand the value investing philosophy and then start applying it in your own way…I mean if you don’t have his circle of competence (who does?), then why concern yourself with his moves.
Nobody is arguing that he’s the best in the world. When it comes to investing, however, people should only buy what they understand, not what someone else is buying (even if that “someone” is the best in the world). Investors need to know what they hold and how to follow it…and when to sell…even if Buffett may disagree with their decisions. We all have different spheres and goals — even Buffett.
Don’t get me wrong: I don’t think you/we can find a better mentor and I’m not arguing his track record or his investment style today. All I’m saying is that it may not be Buffett himself dumping JNJ; and, if investors hold JNJ, are not sure what to do, and looking for guidance from Buffett’s filings, this one is not that telling.
This year’s annual meeting should be a hoot as I’m sure Widemoat’s question will likely come up — What sort of returns are you (Warren) expecting out of stocks versus preferred stock or bonds? If you were a young buck today with $100,000 (or a million or ten thousand), where would you be investing?
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Buffet will say that if you are a young buck today with $100,000 or even $1 million that you should be investing in stocks. In particular probably small stocks and definitely in workouts if you are going to take the time to study. However, if you have many billions of dolllars and a cost of capital that’s ridiculously low you should be buying a basket of credit or credit-like instruments with equity lottery tickets attached earning you between 10% and 15% annually with very little risk. The credit trades he is making are small dunks. They are the 1-foot hurdle bet especially when your cost of capital including the insurance float is probably sub-5%. A young buck with a small nut doesn’t have that kind of cost of capital and needs bigger returns. Fortunately, bigger returns are available. Also, Warren will say that he expects the S&P500 to underperform historical averages for some time. He’s implying this with the maturity of his credit investments that it’s at least 5 years. He’s made these types of credit bets before. The structure of the Goldman and GE deals is very similar to his Salmon investment in the late ’80s. The other credit bets are similar to the high yield telecom bets he made post-Worldcom. He talks about his theory for investing in preferreds, convertibles, and credit in the letters.
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Mucho Macho here and proud of it too. I have a list of stocks that I want to buy. I also have the complete list of Buffett’s stocks. I monitor both lists and scour Buffet’s for anything that makes sense for me. Do I think I’m as good as Buffett? Not even 1/2 of 1% and never will be. In a sense, I do imitate Buffett in that I try to do what I think he might do if he was a young(er) buck with a small nut (my left one).
If I owened JNJ I would not sell it at this point, because I feel that Buffett sold it for reasons that apply to him and not to me. I don’t actually have to make the decision, because I never bought it to begin with as though I think it’s a great old, rich Buffett stock, I doubt that a young Buffett with a small nut would be buying it.
My machismo stems from the fact that the only thing I have to work with is my ability to reason and use logic and simple math. My failings will be my own and will be due to insufficient intelligence and/or effort, but not because my decisions were made by someone else, even if it’s Buffett, or Fisher, or Lynch.
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Joe, I wonder if you would do a valuation on Berkshire Hathaway. With the B-shares down to $2,400 per share, it might spark a good discussion on Buffett and ALL his stakes in his various companies, not just JNJ. I have tried to attempt a valuation in my own research, but since BRK is basically a financial company I can’t get to a correct Free Cash Flow/Owner Earnings number and feel totally comfortable about what I’ve come up with. Any thoughts?
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Joe, your point is valid. And yet, if Buffett is not selling JNJ now, because it is his insurance companies which are doing it, how can we say that he bought it in the first place? I would say that the same reasoning implies that insurance companies, not him, were the ones buying JNJ time ago.
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Even if Mr. Buffett, personally, did make the decision to sell JNJ, we need to understand that he is a capital allocator looking for the best places to put Berkshire money to work. If he finds a deal that’s is better than an investment he has made, in terms of expected return and assumed risk, and he doesn’t want to add any new money he is going to allocate his capital accordingly. And it may not be because he thinks JNJ is bad, he simply found an investment that was better.
In any case, I believe he (WEB) couldn’t care less how his moves are being perceived. His job is to do whats best for Berkshire. Simply.
Till next time.
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We know that Buffett and Munger were buyers because JNJ is owned by Blue Chip and Wesco – companies controlled directly (and jointly or solely) by Buffett and Munger respectively. Neither of those entities sold JNJ; so, we don’t know if Buffett or Munger directed the sale.
I’m sure that the question will come up at this year’s annual meeting, though I doubt he’ll talk about it as he doesn’t like to discuss current holdings. We’ll know for certain in a few months.
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Buffett sold JNJ out of necessity for much needed capital towards the GE and Goldman Sachs preferred shares. He also sold some PG and COP. The reason I think he sold these particular investments is due to the capital gains taxes if he had sold out of other positions.
JNJ and PG might be affected negatively in the near future due to high inflation and poor currency conversions. COP was a loss and although oil prices may eventually go higher, they are not going to go back to 2008 levels within the next year. Sure he could sell POSCO but there is a high probability that the shares will go up if there is higher inflation and he still hasn’t lost on that position.
Notice that he did not sell out entirely on these positions and still feels comfortable with holding them. He may even purchase additional shares as more capital becomes available for him to invest.
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We had a few more good gems from the Teacher as he rolled out his annual letter yesterday. The following one is one of the most poignant to me, rendering me giggling, enlightened, puzzled, reassured as the same time.
“Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.”
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That is one of my favorite Buffett quotes.When I was a freshman in college I learned the following simple logical inference:
Socrates is a man.
All men are mortal.
Therefore, Socrates is mortal.
Later in Logic class I learned to build proofs that where several pages long and very impressive looking in their complexity. I would spend hours verifying their validity and when they worked they were a beautiful thing. However, the huge lesson that I took away from all my studies was a very simple one, that you could have a beautiful valid argument which was also utterly false, simply because you failed to notice that the Socrates in question was not the famous philosopher, but your girlfriend’s cat.
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Hi everyone, Joe, thanks again for your beautiful site.
Yeah I’m sorry to post this here although it has nothing really to do with the JNJ Sell, Except that I’m thinking of buying some for myself soon =) (Joe, please feel free to move this to where-ever you seem appropriate.)
The recent (and by recent I mean few months) turmoil really pushed me into searching stocks for myself, apart from JNJ, which came to my attention from reading about it here or in Buffet related articles, I find it really hard to find stocks by looking at what I really want. What I mean is that I’m dying to find a stock screener that actually checks FCF, CROIC, or any *valuable* figures. any suggestions? and please add if you can the criteria you usually use.
Thanks a lot,
Dan.
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Hi everyone, Joe, thanks again for your beautiful site.
Yeah I’m sorry to post this here although it has nothing really to do with the JNJ Sell, Except that I’m thinking of buying some for myself soon =) (Joe, please feel free to move this to where-ever you seem appropriate.)
The recent (and by recent I mean few months) turmoil really pushed me into searching stocks for myself, apart from JNJ, which came to my attention from reading about it here or in Buffet related articles, I find it really hard to find stocks by looking at what I really want. What I mean is that I’m dying to find a stock screener that actually checks FCF, CROIC, or any *valuable* figures. any suggestions? and please add if you can the criteria you usually use.
Thanks a lot,
Dan.
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>> Sure he could sell POSCO but there is a high probability that the shares will go up if there is higher inflation and he still hasn’t lost on that position.
Berkshire actually bought more Posco shares in 2008 at about $ 400 a share. Be aware the PKX ADRs represent a quarter of a share.
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The letter had a few more Buffett quips that will certainly stand the test of time. We now know that Buffett sold positions to preserve capital levels ahead of what he predicts to be very tough times. Notice that he specifically called COP an error, but not JNJ.
Dan – I like Morningstar’s premium service as a starting point for research.
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Dear Joe
Your valuation method would give a buy at $51 if you include the 2008 results in, instead of $60 previously. How do you rectify and account for this situation and assure which is the appropriate value. Does that mean you have bought at a premium because the fcf in 2008 has decreased?
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I agree that WEB may not have actually been dumping his stake in JNJ. However, he may have had other reasons to want the cash, and thought that selling some JNJ was the least offensive option. Berkshire also sold some Conoco Phillips, but not a huge % of the total stake. My guess is that JNJ just held its value better than other companies, and Buffett or his other managers had better places to stick their investment money in this market.
The only thing that you say that I disagree with is your last comment: “buying or selling JNJ based on his 13F-HR or the noise in the media is a poor investment strategy”. There have been academic papers (I’m thinking of Martin and Puthenpurackal’s paper at the moment, which I’ll send to you upon request) that have shown that doing just that has been supremely successful over the years. Indeed, I would say that while I wouldn’t sell JNJ, or necessarily strictly imitate Buffett, it’s hard to argue with the success of the strategy. While ignoring the “noise” is absolutely a good idea, ignoring Buffett probably isn’t.
Buying Berkshire itself doesn’t provide the same returns, as you are buying many things that have already matured. I think buying and selling when Buffett does would provide greater returns than buying into his portfolio of static holdings (though you don’t get all the nice cash spun off from Berkshire’s privately held companies without buying shares of BRK.A/B yourself).
If anything, prices are so out of line for some companies right now, that it is almost certainly a good idea to reassess your holdings, and see what you want going forward. I’m not an advocate of active portfolio turnover, but I’d rather have an undervalued GE or COP than a fairly valued JNJ.
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