We're doing a theme week on Industry Focus over the next five days on times we were wrong in the past. To kick the week off, we look back on a show in November 2015 about how we believed that budding allegations of aggressive sales practices at Wells Fargo (WFC 6.37%) wouldn't change the investment thesis in the bank. In this segment of the show, we talk about the lessons we learned from this mistake.
A full transcript follows the video.
This video was recorded on Aug. 21, 2017.
Gaby Lapera: When we were going through to make this show, one of the things that I did was I went back and I reviewed my notes to see if there was a time that really stood out to me that we were wrong, and that's a really key thing that I think is really important for investors to take away from this -- it's really important to keep notes, keep an investing journal, I think, so that you can look back at what your original thesis was and test to see if it still holds true against current conditions, because that's really the only way to know whether or not you've made a mistake, unless you have a perfect memory, which I definitely don't.
John Maxfield: Another lesson in all this, Gaby, this is what I took away from this. You never know anything for sure. I was looking at Wells Fargo, and you know, I've talked on the show a lot about how I like to read about the history of banking. I mean, total snoozer, I'm aware, but I like to do that.
And if you look at Wells Fargo, Wells Fargo was founded in 1852, 165 years ago, during the California Gold Rush in the San Francisco area. In 1855, it survived its first major market crash, whereas all of its competitors failed three years later. Since then, it's had some ups and downs, principally when it changed from being a stagecoach company to an actual bank. That was a difficult transition for it.
But ever since then, Wells Fargo has been known and trusted by investors, by its customers, by analysts, by industry observers, by basically everyone. Every person that I've talked to in the wake of the scandal was totally surprised at what was going on at that bank. And what this drove home to me is, even when you think you know something based on a century and a half's worth of evidence, unexpected things can still happen. So when you're buying stocks, when you're doing things financially, you should always keep that in the back of your mind and stay humble.
Lapera: Yeah. And that's why diversity in your portfolio is so important. If you had had all your eggs in the Wells Fargo basket, it wouldn't have been disastrous. You still would have gotten a 6% growth from last year to this year, but it wouldn't have been great, either, and you would have missed out on so many other things. And who knows what else is going to happen is the point. So it's important to put your eggs in all the baskets. Yeah, you really don't know what's going to happen, and that's OK. That doesn't mean you should not do things, either, you know?
Maxfield: And the other thing, Gaby, is that, in this case, in the Wells Fargo case with this particular scandal, yeah, you wouldn't have lost money. The stock still went up 6% in the past year. That original fake-account scandal was announced in September of last year. So, through that, it's still gone up by 6%. But when you're dealing with banks, because they're so highly leveraged, and because they borrow money on the short-term basis and lend it on the long-term basis, they're very vulnerable to liquidity crises. There could be much more significant things embedded in a bank and on its balance sheet that could come to fruition that could really hurt your portfolio.
I think of Citigroup. In the financial crisis, Citigroup was the biggest bank in the country. Everybody thought it was this sophisticated, amazingly run bank. It turns out, over the course of 12 months, it went from being this market darling to being -- well, it would have failed, like 10 times over, had taxpayers not come in with something like $80 billion in direct capital that was injected into that bank. But then, if you look at all the loans guarantees behind it, it was trillions of dollars' worth of loan guarantees behind it that the federal government provided. The point being, if you look at what happened to Citigroup stock, it's still down something like 90% from its high before the financial crisis. The point being, you never ever, ever know until it's too late.
That's why, to your point, that's a great point about diversity. It's really important to have a diverse portfolio.
