Did Buffett Blunder on Wells Fargo?

Warren Buffett added to Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) position in Wells Fargo (NYSE: WFC  ) during the first quarter (Berkshire was already the California lender's largest shareholder), taking advantage of the market's fear and loathing of bank stocks. However, he did so ahead of a development that he himself had said would be "hugely negative for shareholders." Did he blunder?

A fly in the equity ointment
The event in question was the government's requirement that Wells Fargo raise $13.7 billion in equity capital on the back of its stress test results. That amount was the second largest among the 19 financial institutions under scrutiny (Bank of America (NYSE: BAC  ) "won" with a $33.9 billion capital shortfall while basket case Citigroup (NYSE: C  ) requires $5.5 billion). Wells subsequently raised $8.6 billion through a sale of 392.2 million shares at $22 apiece, diluting existing shareholders -- including Berkshire Hathaway -- by approximately 9.2%.

Margin of safety protects against dilution risk
Buffett isn't insane; although I don't think he was expecting Wells Fargo to have to raise capital, the prices at which he invested -- ignoring volume effects, Wells' average closing share price in the first quarter was $16.53 -- left him with a significant margin of safety against the risk of dilution. As far as the shares he already owned, their cost basis (coincidentally) almost exactly matches the $22 price at which shares were sold in the most recent offering.

Wells Fargo isn't the only bank in which Buffett snapped up more shares: He also added to his position in US Bancorp (NYSE: USB  ) . No dilution cost there – U.S. Bancorp was given a clean bill of health by authorities.

Buffett points us in the right direction
The day after bank stress tests were released, I wrote: "Certain banks look like decent bets right now -- but I'd recommend that investors restrict themselves to the highest-quality names." Although they are no longer as attractive as they were during the first quarter (I don't think Buffett would go all in on Wells Fargo at recent prices), both these institutions certainly qualify on that criterion.

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Alex Dumortier, CFA has a beneficial interest in Wells Fargo, but not in any other of the companies mentioned in this article. Berkshire Hathaway is a Motley Fool Stock Advisor and a Motley Fool Inside Value selection. The Fool owns shares of Berkshire Hathaway. The Motley Fool has a disclosure policy.


Read/Post Comments (15) | Recommend This Article (46)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2009, at 4:04 PM, wuff3t wrote:

    I think if Buffet had blundered he would have admitted as much. He seems to be startlingly honest about such things.

  • Report this Comment On May 18, 2009, at 4:10 PM, catoismymotor wrote:

    Time will tell.

  • Report this Comment On May 18, 2009, at 4:39 PM, geneambo wrote:

    For whatever value your doubts are, he is still one of the

    world's most prosperous in terms of acquired wealth via

    the market as opposed to the Motley Fool entourage.

  • Report this Comment On May 18, 2009, at 5:44 PM, DrRoberts1 wrote:

    Although they are no longer as attractive as they were during the first quarter (I don't think Buffett would go all in on Wells Fargo at recent prices), So WFC is not quite as attractive as when it was trading for 7 and change. Fortunately, nobody has to pay for this investment "advice". But then on the other hand, one gets what one pays for. This poster is long WFC.

  • Report this Comment On May 18, 2009, at 5:53 PM, TMFAleph1 wrote:

    geneambo,

    Thanks for your interest. I'm curious: Did you read the article?

  • Report this Comment On May 18, 2009, at 8:14 PM, 7footmoose wrote:

    Mr Buffett has the investing credentials that every serious investor strives to emulate but that does not preclude him from making an investing error. WFC is a fine company. Wachovia in many respects was also a fine company. Today they are one and they have many hurdles to clear before WFC's acquisition of Wachovia can be declared a victory. WB purchase at an enormous premium Golden West the largest purveyor of pick a pay loans, toxic, toxic, toxic. WB a few years ago purchase Western Financial one of the largest providers of dealer finance in the country and merged it into their own dealer finance business, toxic, toxic, toxic. They both have large aggressive HELOC businesses, toxic. WB sold its credit card business to MBNA (now BofA) this shrinks the combined credit card risk. Combined they have a large insurance business good for fee income. How well the combined entity will do only time will tell bu I suspect that Mr Buffett has it right. But, even being right does not preclude bumps along the road and even a long and winding road can lead to a flat or two along the way.

  • Report this Comment On May 18, 2009, at 11:57 PM, texastar1 wrote:

    I have been looking at several banks for a few months. I too believe that Mr. Buffett got it right (again!). I can see WFC in the mid thirties by the fall...yes, some bumps along the way but this is the nature of the market, particularly these days!

  • Report this Comment On May 19, 2009, at 11:40 AM, socalclint wrote:

    IMHO WB is a cancer that keeps spreading. As I've stated before, he is the Walmart of investing. His purchases in some cases have shut down entire manufacturing towns here in the US and shipped 'em to China as soon as he could. HHBrown Co. (shoes) is wholly owned by BH (Born, Sofft, Dexter, Brunswick,Corcoran, etc). Nearly all of these brands are now made in Asia (and a few other spots...not in the US as they were pre-WB). Additonally, to compete w/the vendors (store owners, like myself) he bought an online discount retailer to undercut those who retail his products. You can look it up, please don't take my word. He has put so many out of work all in the name of a buck, I've no idea how others have been affected by him, but in the shoe business he is despised, and rightly so.

    I'd also like to point out that while you're paying more for these shoes, he lowered quality (therefore his cost) but didn't pass that on to you or me. THIS is a model for investing? Sorry, I'll pass. I've made some great money both from stocks & luckily, my store, all w/out putting a single person out of work, in fact, I'm still hiring and expanding. When he invests I always assume someone is going to lose their job. I'll pass on any investment advice from a guy who I can only compare to John Hammond from Jurrasic Park (looks kind, ends up insane & evil). No thanks.

    PS: In 1993 he called this purchase his worst investment ever. I agree and I suspect the employees, er EX-employees would agree.

    Money isn't everything.

  • Report this Comment On May 19, 2009, at 12:33 PM, PricePro12 wrote:

    Did Buffett Blunder on Wells Fargo?

    Is a bad title for this story. Mr. Buffett is a very smart man and everyone makes mistakes, but if you do look at all the banks and make a general anyalsis you will see that he is correct in his statements. GO BUFFETT!!!

  • Report this Comment On May 19, 2009, at 12:54 PM, wuff3t wrote:

    "I'll pass on any investment advice from a guy who I can only compare to John Hammond from Jurrasic Park (looks kind, ends up insane & evil)..."

    Lol. That seems a little over the top...?!

    I thought his preferred mode of business was to buy good businesses then let them run as before, ie with the previous management still in place? I have to admit I haven't put much effort into researching this so you may be right in the points you make, but even so that doesn't really invalidate his investment style. He's a businessman, his job is to make the most profit possible. I doubt he's doing anything that everyone else isn't doing at that level.

  • Report this Comment On May 19, 2009, at 1:09 PM, wannainvestsmart wrote:

    That depends on when he put in his money. He first suggested that WFC was a good company in March, before the rally. If he went in at $10, he is already making a killing.

    Quality and price are equally important.

  • Report this Comment On May 19, 2009, at 2:09 PM, ron153 wrote:

    I am quite certain the Mr. Buffett was holding his breath, waiting for some CFA from Motley Fool to evaluate his investment decisions. I am also quite certain that Mr. Buffett is greatly relieved that his decision was marginally acceptable to this brilliant strategist.

  • Report this Comment On May 19, 2009, at 2:18 PM, TMFAleph1 wrote:

    PricePro12,

    Thanks for your interest, but I'm curious: Did you read the article?

  • Report this Comment On May 20, 2009, at 6:02 AM, socalclint wrote:

    "He's a businessman, his job is to make the most profit possible. I doubt he's doing anything that everyone else isn't doing at that level."

    Isn't that exactly what the guys @ Enron or (insert today's failing company) were doing? Frankly, that should scare everyone, I think. However, I don't think it invalidates his investment style, I just don't like a style that throws people out of a job...that's not really a style it's more of a slash & burn technique. Sure he's made some money by doing this (ok, a lot) but when he's gone & the inevitable 'accounting errors' are found, it's going to be the shareholder left holding the bag.

  • Report this Comment On May 25, 2009, at 4:23 PM, jmac55 wrote:

    It's interesting looking at their REO inventory:

    http://www.thehardmoneypros.com/REO_bank_owned_property_dire...

    And their loan portfolio default rates:

    http://www.thehardmoneypros.com/Top25_Largest_Banks_Defaulte...

    Their default rates for residential 1-4 very highest of all 25 top banks.

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