Buffett May Not Have Sold JNJ

By Joe Ponzio on February 18, 2009 | 22 comments

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:

Berkshire Changes to Johnson & Johnson

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.

Written by Joe Ponzio on February 18, 2009

Joe Ponzio is the managing partner of the Ponzio Investors Funds and owner of Ponzio Capital Inc, a registered investment advisory and deep value portfolio management firm. The author of F Wall Street (the book and the website), his articles have appeared in hundreds of financial media, including Financial Planning Magazine, CNBC.com, Yahoo! Finance, and Reuters. He has appeared numerous times nationally on both radio and television, and has presented at universities and seminars across the United States.

Read more articles like this online at www.fwallstreet.com.
To learn more about Joe's portfolio management services, visit www.ponziocapital.com.

Also Filed Under "Companies Analyzed (Generals)"

The Discussion

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Chris
Feb 18th, 2009
3 comments

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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