Warren Buffett and Berkshire Hathaway's (NYSE: BRK-A ) (NYSE: BRK-B ) largest stock position is Wells Fargo (NYSE: WFC ) . This fact is well-known, but how this position got to be so massive is seldom discussed.
The remarkable buying spree
Berkshire Hathaway first bought shares of Wells Fargo in 1989, yet Buffett really began his buying streak when he bought more than 50% more in 2003. When writing in his annual letter about the 3.3% stake in the bank, Buffett said simply:
We bought some Wells Fargo shares last year. Otherwise, among our six largest holdings, we last changed our position in Coca-Cola in 1994, American Express in 1998, Gillette in 1989, Washington Post in 1973, and Moody's in 2000. Brokers don't love us.
The Coca-Cola and American Express positions still remain among the "big four" but Buffett hasn't bought a single share of either of those since 1994 and 1998, respectively. Wells Fargo, however, is an entirely different story:
In the nine years since 2004, which have been some of the tumultuous in the history of both Wells Fargo and the broader financial sector, Buffett has grown his position on average by $1.3 billion a year.
The reason for the spree
So, what made Buffett continually add to his position?
In an interview with Fortune magazine in April of 2009, as the S&P 500 stood at a staggeringly low 875, and Wells Fargo had watched its stock price fall by more than 50% since September, Buffett said:
In the end, banking is a very good business unless you do dumb things. You get your money extraordinarily cheap and you don't have to do dumb things.
And Buffett said Wells Fargo simply didn't do those very "dumb things" that brought down so many other banks, who followed each other like "a flock":
It's sort of hard to imagine a business that large being unique. You'd think they'd need to be like any other bank by the time they got to that size. Those guys have gone their own way. That doesn't mean that everything they've done has been right. But they've never felt compelled to do anything because other banks were doing it, and that's how banks get in trouble, when they say, "Everybody else is doing it, why shouldn't I?"
Of course, Buffett has been rewarded, as Wells Fargo has delivered a total return -- including dividends -- of nearly 175% versus 115% for the broader KBW Bank Index, and 140% for the S&P 500.
The key takeaway
It's no secret Wells Fargo has continuously carried a lofty valuation relative to its peers. And Buffett has long been known as a value investor. So why does he keep buying this "expensive" stock?
Buffett revealed in 2012:
More than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price
Through his continued purchase of Wells Fargo, Buffett reveals that understanding the true value of a business extends beyond just what is shown on a balance sheet and income statement and into things like avoiding "dumb things."
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