Buffett's Wrong: 5 Companies That Beat His

My jaw hit my chest when I heard it.

I sat dumbfounded at Buffett-Fest '09, otherwise known as the Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) annual meeting. As one of 35,000 value investors who trekked to Omaha, Neb., last weekend to hear the wisdom of Warren Buffett, I nodded my head along with the rest of the crowd for most of the day.

Judge a company by value, not stock price. Nod. America will recover from this financial crisis. Nod. Derivatives are bad. Nod. Wells Fargo (NYSE: WFC  ) is the best stock in the world to go all in on. Huh?

I knew that Warren Buffett was standing by many of the banks in his portfolio -- namely Wells Fargo, US Bancorp, and M&T Bank. So I wasn't all that surprised when he said that "[Berkshire] would buy stock in any of the three at current prices."

But, as you know if you've been reading the Fool site this week, he took it oh so much further: "If I had to put all of my net worth into one stock, that would be the stock."

The caveat is that he was referring to Wells' March lows, below $9 a share. Shares are up above $25 now, so Buffett probably wouldn't be so emphatic at present.

But still!
I'll buy that Wells Fargo had tremendous upside potential in the single digits (some argue it still does), but the possible downside precludes me from naming Wells Fargo my "if-I-had-to-go-all-in" stock.

I've said in the past that you need three things before it's wise to invest in a bank:

  • Particular insight into bank balance sheets.
  • An unshakable faith in that bank's management.
  • Comfort in speculating on the final form of the government bailout initiatives.

With the possible exception of a handful of Wells Fargo employees, no one knows Wells Fargo's balance sheet as well as Warren Buffett. And Buffett has grown very familiar and trusting of Wells' management throughout the years. But even he doesn't know for sure what path the government bailout initiatives will ultimately take.

Now, am I calling his continued investment in Wells Fargo foolish? My head shakes no. His expertise in all three areas I've mentioned exceeds that of most other investors. So while the remaining uncertainty surrounding the government's role in banking has me disagreeing with Buffett's extreme statement, I don't think he's foolish to invest a portion of Berkshire's money there.

However, I will turn to his investing prowess to find my own top investments. Here are three companies Buffett owns that I'd choose over Wells Fargo as an all-in stock -- even at their current not-quite-bargain-basement current prices. These three all have products that will still be in demand decades from now, and they have no need for government support:

Company

Moat

Wal-Mart (NYSE: WMT  )

Scale

Johnson & Johnson

Intellectual Property, Brand

Procter & Gamble

Brand

You'll notice that Berkshire has significant holdings in all three of these companies. Wells Fargo isn't even the safest bet in his own portfolio!

Hey, what about the others?
I promised you five companies that beat Wells. For a fourth, I'll turn to my Foolish colleague Joe Magyer, who has declared ExxonMobil (NYSE: XOM  ) the greatest company in the history of the world. Um, I'm not quite that bullish on ExxonMobil, but I certainly agree that it's time to consider buying some oil plays.

For my fifth company, I'll cheat a little -- but hey, Buffett did too, in recommending Wells at less than half of today's price. I'd pick Visa (NYSE: V  ) or MasterCard (NYSE: MA  ) -- I'm largely agnostic between the two, since they share virtually identical business models. They are the two biggest names in an industry with high barriers to entry, one that boasts great growth prospects as we get closer to a cashless world. Remember also that their partner banks are the ones that actually provide credit; so although Visa and MasterCard could suffer from lower near-term volumes, they won't have credit-related writedowns. They're richly valued right now, but I'm hoping for better prices as the credit card market hits turbulence. Like Buffett often does, I'll sit patiently, ready to strike.

Don't get giddy yet
Just so we're clear, it's never a good idea to put all your money into one stock (even if that stock is Berkshire Hathaway). And if Wells Fargo falls back into single digits, don't go overboard taking Buffett's statement to its logical extremes. All the stocks I've mentioned should be researched thoroughly and used only as part of a well-diversified portfolio.

Since we've been considering an extreme case, I've been purposely risk-averse in the five stocks I've mentioned. Though certainly not without risk, all of them let you sleep pretty well at night. My fellow Fools over at our Inside Value newsletter service have performed a similar exercise, singling out their top five stocks for new money. Actually, they've done me one better, picking their top five on a risk-adjusted basis and their top five based on highest potential upside. Unlike Buffett, they don't have Wells Fargo on the latter list -- but another financial company did make the cut. If you'd like to see their recommendations, I invite you to take a free 30-day trial by clicking here.

Anand Chokkavelu owns shares of Berkshire Hathaway. He tries his hardest not to go all in before the flop with a pair of queens. Berkshire Hathaway is a Motley Fool Stock Advisor pick. Berkshire Hathaway and Wal-Mart are Motley Fool Inside Value picks. Johnson & Johnson and Procter & Gamble are Motley Fool Income Investor recommendations. The Fool owns shares of Procter & Gamble and Berkshire Hathaway. The Fool has a disclosure policy.


Read/Post Comments (26) | Recommend This Article (107)

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 06, 2009, at 5:14 PM, ozzfan1317 wrote:

    For an Oil Play I would rather go BP or Conoco Phillips just my opinion though.

  • Report this Comment On May 06, 2009, at 5:28 PM, TMFBomb wrote:

    ozzfan1317, Buffett bought Conoco Phillips stock for Berkshire, so he'd probably agree.

  • Report this Comment On May 06, 2009, at 5:37 PM, Carioca58 wrote:

    Please, stop with all the Buffett's headlines already. It is getting worn out.

  • Report this Comment On May 06, 2009, at 5:38 PM, lrecap wrote:

    I agree that WFC would not be the most likely prospect. I also not that there are many commentaries out that "wonder" if Warren has drifted off in his more mature years. I also have a negative against WFC from a bad experience with them many years ago. And But I would also venture to say that Warren is most likely to still be far, far better than any one speculating herein. As for your points, I suspect that Warren may better understand the first and last better than we do (at least probablistically) and for the next 5 or 10 yrs, it may very well be that WFC will return more than the others that you have stated - - - especially under the conditions/prices that existed when he made the statement. I was not there, nor maybe he had other caveots in mind qualifying his statement. I guess what he says gives other a chance to second guess with their words of "wisdom". Let me know when your are able to match 1/10 of his success. :). lre

  • Report this Comment On May 06, 2009, at 5:44 PM, Magrathea78 wrote:

    Shame on you and your editors for that headline: "Buffet's Wrong."

    Opinions about future events can seldom, if ever, called "Wrong". If you were commenting about alleged facts you can prove false, THEN you can use "Wrong".

    A better headline would have been, "Where I disagree with the 'Oracle'"

  • Report this Comment On May 06, 2009, at 6:18 PM, tomd728 wrote:

    Irecap.....Buffett made the comments in the cold morning Omaha light to Becky Quick of CNBC.

    He had no caveats and no comments either on why he liked WFC over the long haul.

    With the recent action and *"positive" stress tests, as

    reported, through leaks etc.WFC and the other sick pups are certainly a short term trade.A trade,in fact,made already by the not so faint of heart.....then again a certain segment of the trading community believed that the stress tests would all be in unison with an A-OK lest the public get real ugly on their services.

    Me ? I don't believe a word of what is coming out of D.C. in regard to the Savings Banks.

    Certainly BAC has the best deposit gathering branches of them all simply by being in diverse neighborhoods and have been for a long time.I'm not buying BAC either.

    Mr.Buffett can have all he can hold of WFC and BCA !!!!!!

    Has Buffett lost his fastball ? I think not.For the poster who asked that question,I simply ask him to

    go back to earlier this year when he (Buffett) put on

    some dazzling plays lending and using options to bring it home.

    I'm going to continue looking in other parts of the stock universe for buys and sells.

    Respectfully,

    Tom Durkin

  • Report this Comment On May 06, 2009, at 6:23 PM, NOTvuffett wrote:

    I have bought and sold WFC since the single digits. I sold because of uncertainty about government policy. It looks like they will have to increase capital by 10bln which is relatively small to market cap so shouldn't dilute current shareholders especially since the Oracle is doing his PR campaign.

    At this price I don't think I would buy because it is probably close to a fair price in the near term but I think it will be extremely strong in the long term.

    The mark to market rule change potential to skew the balance sheet has me concerned, but I am not an expert on this by any means.

  • Report this Comment On May 06, 2009, at 6:52 PM, haww wrote:

    If you're planning on investing into oil for some profits, then you might want to wait a while because the market controls oil prices and the market is shaky right now. It might be a good idea to wait to make sure the market has a definate foundation.

  • Report this Comment On May 06, 2009, at 6:57 PM, clayferg wrote:

    I have noticed that when individuals get caught up in their own celebrity the thing that made them famous fades. Buffett face and voice are omnipresent. He is unavoidable especially if one has anything to do with The Motley Fool or CNBC. May we have a break, please?

  • Report this Comment On May 06, 2009, at 7:16 PM, jbrt wrote:

    one word sums it up .... S E N E L I T Y !

  • Report this Comment On May 06, 2009, at 8:04 PM, WAMPUS1 wrote:

    Anand Chokkavelu ? Never heard of you so before you start telling us that multibillionaire Warren Buffett is wrong perhaps you will enlighten us with a bit of history about yourself, your net worth and a bit of a history in your own portfolio?

  • Report this Comment On May 06, 2009, at 8:08 PM, scotchbarn wrote:

    Oh dear, jbrt.

    When you put a word in capitals followed by an exclamation mark, at least try to spell it correctly.

    Try....S E N I L I T Y !

  • Report this Comment On May 06, 2009, at 9:05 PM, pohick2 wrote:

    <<sigh>> could you please not hype your stock picking, by saying Buffett's wrong? it's not clear that he would disagrre with your picks.

    but you are fundamentally wrong if you speak of stocks with no mention of the underlying business <b>Intrinsic Value</b>

  • Report this Comment On May 06, 2009, at 9:11 PM, 7footmoose wrote:

    there is nothing unique about WFC, there is no moat around WFC's business that prevents another financial institution from doing what they do and even doing it better, WFC is not different from other financial institutions on any significant level other than its people and its management, for Mr Buffett to declare WFC the one stock he'd own if he could only own one stock ignores one of the fundamentals of his, Mr Munger's and Benjamin Graham's basic investment philosophy inherent in Coca Cola and other successful companies, a lack of replication

  • Report this Comment On May 06, 2009, at 11:12 PM, TMFBomb wrote:

    Thanks for the discussion so far!

    To be clear, I'm not saying that Buffett is wrong in picking Wells Fargo as an investment...I'm merely arguing that there appear to be other companies out there without the downside risk inherent in a now highly government-regulated industry.

    -Anand

  • Report this Comment On May 07, 2009, at 1:20 AM, knighttof3 wrote:

    7foot -

    WFC's moat is the management team that avoided risky plays when everyone else was drinking the subprime kool-aid.

  • Report this Comment On May 07, 2009, at 1:21 AM, 3weetabixaday wrote:

    i have an ad blocker activated on my internet browser (firefox) which does a pretty good job already.

    surely it only needs a couple of tweeks to block all ads by anyone including google...then how would their moat hold up to that?

  • Report this Comment On May 07, 2009, at 5:43 AM, 7footmoose wrote:

    knighttof3, respesctfully

    i am not interested in provoking a long debate about WFC but to say management avoided the toxic mess ignores the acquisition of Wachovia, a similar statement could be made of BofA if they had avoided the acquisition of ML, neither company avoided sub-prime loans, HELOC overexposure, excessive commercial and residential real estate exposure, both have excellent franchises with widely diverse geographic dispersion and similar product arrays, the wisdom of the acquisitions will play out over time, both may prove to be either winners or losers, i simply submit that there is nothing unique about WFC's business

  • Report this Comment On May 07, 2009, at 7:27 AM, Hebmeister wrote:

    As I suspected by the title, another article slamming another's stock pick, while not giving me the author's choice unless I send more money. Another teaser article that reinforces my feeling that sending the Motley Fool money for a subscription was a bad decision.

  • Report this Comment On May 07, 2009, at 8:47 AM, petrus62 wrote:

    Well if you don't mind, I'd rather listen to Mr. Buffett than to Mr. Chokkavelu.

  • Report this Comment On May 07, 2009, at 9:03 AM, rmiers wrote:

    Have had access to close Buffet friend for years. He has never and would never betray his investors. He is old fashioned to a fault one might say, but as historians rightly point out, "history repeats itself".

    He proudly points out that he has never sold one share of his own stock. I believe that he has a collective of eighteen or nineteen bright young capitalists that work for him along side the venerable Charlie Munger.

    Mr. Buffet is not a elitist and is hated and feared for it. In short, he is a very nice man.

    Armed with this knowledge, I am concerned by his alliance with Bill Gates (a known greedy, unprincipled, pirate) and his support for Barrack Hussein Obama.

    America is a republic and although generous, not socialist, which this present Kenyan is busily trying to transform. I might end up in a gulag for that statement someday if the wildly popular (52%) world leader succeeds in his line of bull. (write a hot check to cover other hot checks).

    Enough said, Buffet was never cruel or cheap so he doesn't need to do a Andrew Carnegie turnaround. In fact, he has lived a clean, decent, honorable life.

    The only realistic theory I can come up with is, He can be conned, and that in his old age, he sees the great needs of the uneducated and the impoverished. He does not know that the "party of the people" are in fact, "the robber barons of the past"

  • Report this Comment On May 07, 2009, at 4:23 PM, multi007 wrote:

    My "All In" stock is The Harford - HIG. 30% of my portfolio is in HIG bought 2 weeks ago at $12 ish.. I wont even look at it until next year.

  • Report this Comment On May 08, 2009, at 11:28 AM, clipinski wrote:

    multi007, I think your bet on The Harford (HIG) we be a disaster in less than 1 year. They have huge exposure to commercial real-estate and that is a train wreck in the making. I believe HIG will be filing for bankruptcy in less than 2 years.

    Craig, MBA, CFA

  • Report this Comment On May 13, 2009, at 12:19 PM, catoismymotor wrote:

    If I were forced, at the point of a gun, to just choose one stock I would pick LUK. The reason is they are well diversified, know how to invest in commodities and the main players have been at the wheel for decades. If I recall correctly they have out paced BRK-A for the last decade.

  • Report this Comment On May 13, 2009, at 5:06 PM, finkle55 wrote:

    Warren Buffet has definitely secured his reputation in the world of stock and option trading. While he may be referring to numbers that one person believes to be an inappropriate elution there seems to be a need for discretion over valour. The concepts that he is referring to are time tested and obviously true. In the long run I listen to Warren. I agree that his concepts seem a bit outdated but his experience far trumps his short term "miscommings". I tilt my hat and bid him adue.

  • Report this Comment On May 18, 2009, at 9:58 PM, egm007 wrote:

    Not really sure the point of the article. Title suggests a bad call by the greatest inverstor of all time. When the quote was recorded, WFC was trading under 10. Currently it is over 25... Looks to me like Buffett was right again.

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