Wesco Financial: Smaller Isn't Necessarily Better

Charlie Munger is a legend. He's partnered with Warren Buffett and done great things as half of that duo. His Almanac is spoken about with reverence and his wisdom is quoted regularly.

You'd think that buyers of Wesco Financial would have seen great results by hitching their wagon to his star over the past years. Here is the record of shareholder results as presented by Value Line [in their small-cap edition]. Their latest full-page report was dated April 18, 2008.

Year.............High Share Price..............Low Share Price............Current Share Price
2008 ...............$427.10 .......................$368.19 ........................ $419.00
2007................$501.00 .......................$374.88
2006 ...............$505.00 .......................$360.50
2005 ...............$405.00 .......................$330.00
2004 ...............$433.00 .......................$324.10
2003 ...............$373.00 .......................$285.00
2002 ...............$338.00 .......................$290.00
2001 ...............$350.00 .......................$270.00
2000 ...............$294.00 .......................$200.00
1999 ...............$363.00 .......................$241.50

The high share price of $363 in 1999 was set right at the start of that year. WSC's P/E in 1999 averaged 40.3x meaning investors were paying a very high [probably 'too high'] price for the privilege of investing with him.

'Buy and Hold' investors have seen a share price gain of just 15.43% over almost 9 1/2 years since then.

Including the $14.29 /share in cumulative dividends over that whole period bumps the total return up to 19.36% over almost a decade [for those who bought WSC shares and held from early 1999].

This is not meant as a criticism of Mr. Munger. It is just an example of why valuation matters so much to your ultimate results. Pay too much when you first buy and you have very little hope of a good return.

The 40 times multiple on Wesco shares [in 1999] translated to an earnings yield of just 2.5% . Not surprisingly, that's pretty close to the average annual return that long-term WSC shareholders actually earned over the next decade.

As with all stocks, there were 'trading opportunities' in WSC shares where good profits could have been made with astute timing. This posting is not about that.

If your favorite holding period was, and remains, forever then you have sufferred poor returns for almost the past 10 years by investing with a true legend.

**********************************************************************

Investors in the other legend's shares (BRK.A) fared much better.

Those who continue to assert that "If only BRK were smaller it could be doing 50% per year easily" should view the results of Wesco, [with only 7.12 MM shares and a $2.983 billion market cap,] as proof that just being smaller is no guarantee of better results.

Disclosure: No position in WSC.

Comments

[Chungst:]

You forget, there is a penalty for being a minority shareholder. You have to remember that Berkshire owns about 80% of WSC and Munger agreed to this limit to accommodate an existing WSC shareholder.

Cheers.

2008 May 27 09:18 AM

[Paul Price:]

Chungst,

What is the point of your comment?

2008 May 27 11:37 AM

[Raymon9944:]

I first bought WESCO in 1959 at $23 a share. With splits and stock dividends my shares increased over five fold and my current cost oer share is about $4
RST

2008 May 30 10:58 AM

[raintree:]

Good for you Raymon!

Pity those that bought WSC in 1998 for $350 to $375 a share. On 13-June-2008, it closed at $414. The compound annual growth rate over the last decade is disappointing.

Hmm ... it might be time to put WSC on my watchlist.

RT

2008 Jun 15 08:03 PM