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Berkshire Hathaway Inc. and Johnson & Johnson - Recent Purchases

I have just acquired additional shares in Berkshire Hathaway Inc. (BRK-B) and Johnson & Johnson (JNJ) in one of our daughter's investment accounts. Both are very high quality companies which I think are currently reasonably valued.

On the rare occasion I sell shares but in early October I liquidated my positions in Stanley Black & Decker, Inc. (SWK) and W.W. Grainger, Inc. (GWW) because I will need funds prior to year end. The share price of both companies has dropped subsequent to these sales and I am monitoring both companies with the view of re-initiating a position in an account other than that which held these shares.

I am of the opinion we will witness weakness in the North American equity markets over the short-term so it would be wise to dial back risk.

Summary

  • I am of the opinion conditions are ripe for further broad market pullbacks in the short-term.
  • Investors should welcome share price pullbacks as they present opportunities to determine whether to acquire shares in high quality companies at more reasonable valuations.
  • In early October I anticipated the need for funds before year end and decided to liquidate my position in Stanley Black & Decker, Inc. and W.W. Grainger, Inc..
  • With the broad market pullback on October 28th I decided to acquire additional shares in Berkshire Hathaway Inc. and Johnson & Johnson.

Introduction

In several previous articles I expressed my thoughts about what appeared to be a recurrence of the irrational exuberance we witnessed during the dot.com bubble.

Recently, a friend jokingly sent me a link to someone's Twitter account. The owner of this Twitter account is apparently from the Republic of Slovenia, supposedly has a Masters degree in Economics, and runs a daytrading chatroom! While she is very attractive and poses well in limited attire, she does not strike me as someone from whom anyone should be obtaining guidance on how to make money from equity investing.

In a recent 'tweet' she indicated:

  • Don't Chase.
  • Analyze the chart and pick what you believe is a good buy price.
  • If stock doesn't get to that price don't enter.
  • There will be a new chance tomorrow.
  • Take it easy.
  • Let the best trades come to you.

On a daily basis she sends out a 'tweet' which reflects the ticker symbols of the companies she is 'watching'.

Just for fun I thought I would look up several of these stock symbols. I am unfamiliar with all the companies she follows and the fact the vast majority are unprofitable micro or small cap companies explains why I am unfamiliar with them. Interestingly, the average daily volume of sharestraded is significant and in some cases exceeds the volume of shares traded in the high quality companies I follow!

I then came across an article in which Greenlight Capital's David Einhorn lays out reasons why he thinks tech stocks are in a bubble. Einhorn also shared an anecdote about a 13-year old who submitted a job application to Greenlight Capital with the subject line "I am young, but good at investments."

I was also recently copied on an exchange of emails in which members of an investment club were discussing the use of 50 day and 200 day moving averages to assist in making investment decisions. I recognize many rely on various charting metrics but this 'strategy' strikes me as being akin to driving while looking in the 'rearview mirror'. Perhaps investors choose this method of analysis because it is far easier to do than to read quarterly and annual reports and to read the transcripts of presentations management has recently made to the investment community.

I do not dispute that some investors have success with the use of technical analysis. This approach to investing, however, does not strike me as ideal for long-term investors. If one makes an investment decision based solely/primarily on short-term stock price trends I do not think these people intend to be long-term investors.

It is certainly not my intent to monitor stock prices several times a day. When I invest in a company I want to ensure it is consistently profitable and it consistently generates strong free cash flow. I know companies will go through rough patches so I want to be confident that a company can overcome adversity. The types of companies in which I invest give me far confidence that my probability of generating attractive long-term returns outweighs the probability that I will suffer a permanent impairment to my capital.

Recent Purchases

This is certainly not an environment in which investors should be assuming unecessary risk. I, therefore, acquired additional shares on October 28th in Berkshire Hathaway Inc. (BRK-B) at ~$201.40/share and Johnson & Johnson (JNJ) at ~$138.90. I made these purchases through our daughter's non-registered account which is an account for which I do not disclose details.

I have touched upon both companies in previous articles. These are extremely high quality companies and I have no reason to think they will default on their obligations.

BRK-B does not distribute a dividend but it will repurchase shares when management is of the opinion shares are undervalued.

JNJ does distribute a quarterly dividend and its financial strength (JNJ and Microsoft (MSFT) are the only two companies rated AAA by the major ratings agencies) is such that investors can take comfort that a potential dividend increase will be announced in April 2021 and that the quarterly dividend can continue to be easily serviced from earnings generated through normal business operations; I anticipate a $0.05/share quarter dividend increase (~5% increase from the current $1.01/share/quarter).

Recent Sales

I rarely sell shares but I anticipated the need for funds from a specific account before year end. Rather than risk a drop in the value of my shares before the end of the calendar year I decided to liquidate my Stanley Black & Decker, Inc. (SWK) and W.W. Grainger, Inc. (GWW) positions. On October 7, 2020 I sold 462 SWK shares at ~$171.61/share and also sold 200 GWW shares at ~$375.60/share.

Based on my purchase prices my return on both investments is reasonable.

Following the sale of these shares, the share price of both companies has dropped. I like both companies as long-term investments but am of the opinion their respective share price will experience further downward pressure in the short-term. I am, therefore, prepared to bide my time before re-initiating a position.

Final Thoughts

I hold shares in several companies in which I wish to increase exposure and/or initiate a position. My dilemma, however, is that several of these companies are so richly valued that purchases made at current levels will make it somewhat difficult to generate reasonable investment returns.

While many investors are of the opinion share prices will continue to trend upwards I do not share their optimism. The COVID situation is not under control and the outcome of the US election (and possible resistance to any transition) leads me to believe it is highly probable we will winess further downward pressure on the price of the stocks which interest me.

In this article I disclosed my top 30 holdings. Naturally, this ranking has changed since the time of that article but these are all companies in which I am open to acquiring additional shares. I also have a list of companies in which I wish to initiate a position but with forward P/E ratios above 25ish we will need a similar pullback to that experienced in March 2020 in order for these companies to become reasonably valued. I don't know if this will happen but my fingers are crossed the bottom falls out of the market in short order.

Stay safe. Stay focused.

I wish you much success on your journey to financial freedom!

Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long BRK-B and JNJ.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.