Photo credit: Prayitno.

The StressTest column appears every Thursday on Check back weekly, and follow @TMFStressTest.

Between the end of 1991 and January 16, 2014, Wells Fargo's (NYSE:WFC) stock, including dividends, has returned more than 1,700% for investors. In the process, it absolutely obliterated the returns of the S&P 500 (SNPINDEX:^GSPC).

WFC Total Return Price Chart

Source: WFC Total Return Price data by YCharts

What's the significance of January 16, 2014? Nothing, really. It just happens to be the day I'm writing this. The end of 1991, however, is more notable.

The reason we're going back to 1991 is that 1991 was the trough for the American public's confidence in banking and financial institutions. Well, it was, at least, until 2010. 

Below is a peek at the data from the University of Chicago's General Social Survey. For this particular question, respondents in this survey -- who are asked a wide variety of questions during the 90-minute interview -- are signaling their level of confidence in banks and financial institutions. The top row is for "a great deal" of confidence, the middle row covers "only some" confidence, and the third row is for "hardly any" confidence.

Source: General Social Survey, UC Berkeley website.

While the data is fascinating, the display format, unfortunately, isn't ideal. However, it is color coded. The blues above represent below-normal responses, and the reds are above-normal responses. I've circled 1991 for you.

As you can see from the color coding, there was a big drop in confidence in banks in the late '80s and early '90s, followed by a pickup in confidence, followed by yet another big drop in confidence starting in 2008.

Here's a more zoomed-in version of just the years that we're primarily interested in.

Source: General Social Survey, UC Berkeley website.

For investors, here's where it gets interesting. Remember the bang we started with above? That bit about Wells Fargo returning 1,700%? The period during which Wells achieved that massive return is the period since the time that Americans last decided they hated banks and wanted nothing to do with them as institutions or investments. 

If we think about this logically as investors, it makes a lot of sense. As Baron Rothschild is known for saying...


Sadly, most investors who end up with banks in their portfolios will take the plunge when things are good: the economy is chugging along, bank earnings are soaring, and loan loss ratios are at rock bottoms. This is exactly the wrong time to jump into the sector, because banking is a cyclical industry. Banks tend to overextend themselves and generally do stupid things during the up ends of the cycle. Valuation multiples on bank stocks also tend to be high.

On the other hand, consider the present. Most investors will tell you that big banks are too complex to understand, so they avoid them. Many will also tell you that they simply don't trust banks. As we saw above, the public at large has little confidence in the financial industry. And bank-stock valuation multiples are a fraction of what they were prior to the 2008 crisis.

Which brings us back to Wells Fargo, again.

Is the point here that you should buy Wells Fargo's stock? There are worse things you could do with your money. Wells isn't just Warren Buffett's favorite bank -- and the top holding of Berkshire Hathaway -- by coincidence. It's a high-quality and very well-run bank.

But the point is a broader one. Despite the run-up in bank stock prices over the past few years, now may still be an opportune time to be buying the banks. After all, it wasn't only Wells Fargo that had a massive run-up after 1991. (It wasn't even the top performer!)

WFC Total Return Price Chart

Source: WFC Total Return Price data by YCharts

Through the end of 2006, all four of the big-four banks -- Wells, Citigroup (NYSE:C)JPMorgan Chase (NYSE:JPM), and Bank of America (NYSE:BAC) -- had smashed the returns of the S&P 500.

But it's not quite that simple. Here's what it looks like if you extend that chart out to today.

WFC Total Return Price Chart

Source: WFC Total Return Price data by YCharts

It's not quite as pretty as before. The stocks of Bank of America and Citigroup are still up from 1991, but they're now trailing the S&P during that period by a not-insignificant margin. JPMorgan and Wells Fargo, on the other hand, are still putting a serious beating on the index.

So, the bottom line is twofold. First, even though we've heard a lot about the big gains that bank stocks have had since the financial crisis, there is still a lot of skepticism about the industry. That skepticism, I believe, creates opportunity for investors.

Second, though, is the fact that the future won't necessarily play out well for all bank stocks. As Citigroup's past experience proves, getting your stock knocked down 90% or so can take the wind out of even the most puffed-up sails.

That is to say, I'm adding bank stocks to my personal portfolio as well as my Motley Fool Real Money Portfolio. But as I do that, I have -- and will continue to have -- an eye on which banks have the vision, management, and execution that will keep them from being the biggest losers the next time the industry overheats.