Buffett And Wells Fargo: His Track Record Not As Good As You Might Think

 |  Includes: AIG, BAC, BRK.A, GS, JOE, SHLD, WFC
by: Devon Shire

I’ve been circling back and forth around the financials over the past couple of weeks. I’ve got very little doubt in my mind that the selling in this sector is overdone. These companies are going to be an integral part of the American economy for decades going forward and there is no way that they aren’t for the most part in much better shape than they were in 2008.

But I’m not interested in being contrarian just for the sake of being contrarian. I need to really believe that I’m getting into something that is actually cheap and not just down.

And I’m spending a lot of time staring at that nasty, dirty, ugly portfolio of Bruce Berkowitz. I mean AIG, Goldman Sachs (NYSE:GS), Citigroup (NYSE:C), Bank of America (NYSE:BAC), MBIA, St. Joe (NYSE:JOE), Sears (NASDAQ:SHLD)……it is almost laughable how hated these stocks are. Bruce claims that he is right in his sweet spot right now with the investments that he is making in the financials. Should we believe him?

Here is the evidence pointing to Berkowitz being wrong:
  • He has underperformed the stock market badly for about 9 months
And what is the evidence that suggests he likely knows what he is doing
  • He did exactly the same thing in the last banking blowup in the early nineties
  • He has an outstanding twenty year investment track record
  • He was the best performing fund manager in the last decade
  • He knew enough to completely avoid the financials heading into the financial panic
I know. I don’t get why people can’t wait more than few months before writing him off.
Since Berkowitz made a killing on Wells Fargo after the last banking crisis in the early 90s I thought I’d have a look at Warren Buffett’s Wells Fargo holdings and transactions over the past two decades. The reality is actually a little different than I remember it being. Here are the numbers I pulled from the Berkshire letters to shareholders link:
Cost Change
Value Change
Stock Range
$1.85 to $2.85
$2.45 to $4.50
$4.23 to $5.42
$5.39 to $7.09
$5.50 to $6.87
$5.81 to $8.50
$8.00 to $11.68
$11.03 to $18.71
$15.15 to $21.68
$17.18 to $23.93
$16.09 to $27.84
$19.50 to $25.75
$21.65 to $26.44
$22.67 to $29.04
$27.54 to $31.51
$29.19 to $32.17
$30.52 to $36.67
$27.49 to $37.47
$21.76 to $39.80
$8.61 to $30.02
$23.58 to $33.48
Click to enlarge
A few things stick out.
First you can see the big purchase in 1990 that he actually added to as the stock price went up in 1992 and 1993.
Second, from 1997 to 2001 he scaled back his position size by about 40% from its peak cost basis of $497 million in 1996. This was good timing as the stock price leveled off in the low $20s.
Third, almost $6 billion of the $8 billion Buffett has invested in Wells Fargo was purchased in 2005, 2006 and 2007, which so far has turned out to be an absolutely lousy time to have been buying. During those years the stock price of Wells Fargo ranged from $27.49 to $37.47 meaning that he is still underwater on all of those purchases.
Six billion dollars is big money even for Buffett to be plunking down on a publicly traded equity. It is pretty obvious he had no idea the extent of the housing bubble and what it would do to the entire financial system, stock market and Wells Fargo as these huge purchases came in the calm before the storm.
On the other hand it is amazing how fast and how much Buffett’s original investment in Wells Fargo compounded from 1990 to 2000.
So what do I take from all of this? Two things:
  1. There is much to be said for buying a hated security like Buffett (and Berkowitz) did with Wells Fargo in 1990 and then just leaving it alone for a decade and allowing time for the world to sort itself out
  2. Just because an investor like Berkowitz has success once before in a similar situation doesn’t mean he is correct the next time. Consider that the first time Buffett bought Wells Fargo in size he timed it perfectly. The second time he was buying in size at exactly the wrong time before the housing bubble popped.
I feel pretty strongly that Berkowitz is teeing up some great ideas for us right now. But I’m really having a hard time convincing myself that it is anything but foolhardy to blindly follow anyone, even Buffett, on nothing more than faith.

Disclosure: I am long BRK.A.