Professor Buffett's Health Care Trade

NEW YORK ( TheStreet) -- Warren Buffett cut through the fog of uncertainty surrounding the health care sector and increased his stake in the sector by buying Becton, Dickinson ( BDX) and Johnson & Johnson ( JNJ).

An Aug. 14 regulatory filing revealed that Buffett's Berkshire Hathaway ( BRK-A) had 1.2 million shares of BDX at the end of the second quarter, and had increased its position in JNJ.

Health care reform, a key issue for President Obama, has sputtered to a virtual standstill. The prospect of new legislation has bullied the healthcare sector since before election day, sending everything from healthcare providers to pharmaceuticals on a wild ride. The debate has caught fire in the last few months, and the smoke has obscured significant recovery in healthcare stocks.

It's been a rocky road for Buffett's 1.2 million shares of BDX and 36.9 million shares of JNJ. BDX, which climbed 6.1 percent in the three months ended June 30 to $71.31, settled to $69.83 as of yesterday's close. JNJ has also climbed steadily upward in 2009.

The first commandment of Buffett investing, however, is to buy solid companies at fair prices, and not get mired down in short-term fluctuations. The recent voices in the health care debate have reached a roar, and it is tempting for investors to put their hands over their ears and keep their heads down.

The stark reality, however, which Buffett has keenly grasped, is that America is aging. As baby boomers reach retirement and old age, their numbers will affect nearly every sector in the economy. No matter what packaging healthcare assumes, it is certain that we will need more of it.

Buffett's long-term investment approach has singled out BDX and JNJ with good reason. BDX has held up well during the recession, and its strong revenue stream makes it a predictable pick for the future. While its bioscience business has felt the downward pull of decreased hospital spending, its medical and diagnostic segments have performed well.

Factors like revenue, management and dividends will help BDX in both the long and short terms, as well as an increased focus on research. Proposed policies should continue to encourage spending on research, and government customers could help to boost BDX' bottom line.

JNJ is a well-diversified business that is set to perform well over time. The company has many different revenue streams across the health care industry. JNJ is a major presence in the health care sector, with cash-flows that should sustain the company even though difficult economic environments.

While Buffett favors the long-term competitive advantages of both JNJ and BDX, he is not bullish on every area of the health care sector. Also included in the regulatory filing was the news that Berkshire had cut its holdings in WellPoint ( WLP) by 27% and its stake in UnitedHealth Group ( UNH) by 24%.

Like Buffett, ETFs are a good way to capture certain sectors of the health care industry while avoiding others. JNJ makes up nearly 25% of the Pharmaceutical HOLDRs ETF ( PPH), and biotechnology firms, like the ones in iShares Nasdaq Biotechnology ( IBB), should continue to provide competitive advantages.

It is easy to get distracted by a short-term debate that startles sectors like health care. Short-term fluctuations should not hinder investors from achieving long-term goals. Like Buffett, we must look at the realities of an aging population.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion Management owns iShares Nasdaq Biotechnology.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

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