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Author: Wotdabny Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 459220  
Subject: Re: Thinking About What To Do Now Date: 11/12/2008 2:15 AM
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Recommendations: 8
Hey guys,

What an amazing response from the board. Thank you all for your thoughtful feedback. And not one complaint about what a windbag I am. Most unusual.

I was also pleasantly surprised that my various notions were not shot down as absurd or somehow unpatriotic or just wrongheaded. I have invariably received confused looks and put an end to any number of conversations by suggesting, for example, that large multinationals might outlast any particular government, even ours, even when I cite the example of German and Japanese bond holders of the 20th century. But not this board. Quite the contrary: “Gee, you think?”

But first things first. First, I apologize for discussing specific equities on this board. That’s not really how it works here, and I know that. Thank you for your patience and indulgence.

desertdaveataol, you remark that It's amazing how many of the shenanigans that were going on [during the Great Depression] are going on (in slightly different forms) now.

Back then it was the big banks that tried to step in . . . . This time around it looks to be our government. . . they'll only be able to hold off the inevitable for so long.


This is a central issue: If the gov’t steps in and loses, then what? No, I don’t mean guns ‘n ammo, I mean: Where should our money be? If we believe that, again for the sake of example, JNJ will still be in business in 20 years even if the American gov’t isn’t, isn’t JNJ a better place to put our money than, say, American dollars or American bonds or GNMA funds? That’s a big enough question to be its own thread.

TiRien, I agree that the naive optimism still in the markets is a problem. I’d add that it is strange, even perverse. I would like to clarify that I am thinking of a very long term investment with a 10-20+ year time horizon, as opposed to chasing hot money around in an effort to outsmart myself into riches. Long term investing in strong companies with good brands and good dividends is a proven winner in every country with a stock market for the last 200 years. The sensible optimists have in time triumphed -- eventually. I’m not thinking about jumping in just because the market is 40% lower than stratospheric, but rather investing more along John Burr Williams’ lines as he expresses the desire to do so in The Theory of Investment Value:

A cow for her milk,
A hen for her eggs,
And a stock, by heck,
For her dividends.
An orchard for fruit,
Bees for their honey,
And stocks, besides,
For their dividends.


Times have changed since Williams’ day, who published that poem in 1938. We’ve been sold on the idea that we can trust or at least meaningfully read SEC-approved, GAAP-standardized reports from Wall Street. We can’t. Oh, we can read the stuff, but as the members of this board know too well, it’s lies, for the most part. In the 1800’s investors had little access to reliable numbers; now we have perfect access to bunk. But it seems that people are slowly coming around to this realization, and finally dividends are coming back. There seems to be a slowly dawning awareness that you can fake a balance sheet, but you can’t fake a dividend.

yttire, thank you for your good look at JNJ. I hadn’t noticed that JNJ’s sales were mostly up since Sept. That’s remarkable. I’ll have to look more closely.

You also zero in on one of my concerns with the company: JNJ's debt is NOT excessive, but it is there. What are we to make of this? If we assume a global economic collapse, which companies are truly poised to come out of it the strongest? Are JNJ’s debt and pension obligations a deal-breaker, in the same sense that Warren’s bailout of GE was a deal-breaker for many?

You also mention that perhaps we should make an accompanying board for recession stock picks. I’d certainly welcome that or any other suggestions, except it’s not my place to do so. Wendy?

Several people mentioned the prospect of JNJ being cut in half from here or much worse. To some that seems impossible. All I can say is that years ago I spent many nights looking over the daily numbers from the Great Depression. I learned some things I’ve never read in any book. For example, I saw that no amount of margin was safe -- any leverage at all would have wiped out an investor and left him in debt, assuming he was invested in the DJIA. People talk about it generally, in the tone of “stocks lost more than 90% of their value, and dividends were cut 55%.” That’s true, but the daily grind was worse, much worse than 90%, and for a very long time.

We also don’t pay much attention to another fact: Not many people were invested in the DJIA as such. The DJIA serves as an indicator, and most people here think they can do better than that, and some even have the track record to prove it. And some companies didn’t cut their dividend through the entire depression, and their stock, depressed as it was, came back in time. Those investors who sat on their positions in those companies reaped the reward of all those reinvested dividends at those low prices. That’s what we should be looking for now: Those stocks, not indexes, that will survive.

JNJ, or any other company’s stock, will behave less like the DJIA in times of crisis -- as Wendy pointed out, it already is. If the DJIA gets cut 80% from here, it is more likely that JNJ will either go out of business or get cut by 50% than that it will do whatever the rest of the DJIA is doing. If dividends fall by an average of 55% again, that doesn't mean JNJ’s will. More likely they won’t grow for a time, or else they’ll be cut to zero for a time. Trying to nail down which is most likely is core to understanding if it will be a good investment in the time to come, as dividends protect investors in bear markets and accelerate returns coming out of them.

This is what I meant, Wendy, when I took such a breezy tone in regard to JNJ’s possible political challenges ahead -- they’ve happened many times in the company’s history, and always will. But you make an excellent point: Real turmoil for whatever reason would provide a better opportunity to invest in JNJ than today’s price -- it has before. The charts and figures you kindly provided offer sufficiently strong argument for me to watch JNJ closely rather than start buying today. Although your entire post was a model of instruction, I found your conclusion most powerful: the rest of the market agrees [that JNJ has a stable and safe future], so that JNJ's stock price is not significantly discounted, as many other great companies are. Well, that kind of blows a big hole in my idea that JNJ makes a good investment candidate today. Valuation always matters at the time of purchase. JNJ’s could be lower, and some day, it will be.

EddieLuck, your excellent commentary and review also helps make that case. You’ve also got me thinking about preferreds. And a change of pants. Thank you.

duane1x, you make a compelling case for selling Dec 50s for 80 cents. Here’s a typical, if simplified, scenario I’ve lived through, however: I do exactly as you say. A little after Thanksgiving JNJ falls, at first a little, and then a lot. “Goodie!” I think. The value of the puts is now way up, but it doesn’t matter. On Dec 1, with only a few weeks to go, JNJ actually falls below 50! And . . . nothing. 49. 48. 47 1/2. Still nothing. Now I really want the stock, but I’m not being assigned!?! And, I can’t very well buy my puts back -- their in the money now. 46. The party on the other end of this trade wants to make more. I’m dying. Options expiration comes closer as JNJ edges to just above 50, then to 52, and finally to 56.

But hey, I made 80 cents, right?

Having lived through that, I’ve decided that in some instances selling puts can be a case of outsmarting myself. I’ve done it lately on AAPL, on the idea that I was relatively agnostic about owning the stock and enjoyed taking some money by virtue of its volatility. But JNJ is a keeper, so missing an opportunity like that would, um, suck. Again. That’s why I’ve abandoned selling puts in this case.

Thanks again, everybody.

Wot
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