Warren Buffett’s personal affinity for his portfolio companies is often intertwined with the rash business decisions made by him or his managers. The Berkshire Hathaway chair seems to genuinely enjoy the taste of Cherry Coke; he also appreciates the feedback from Coca-Cola.
It was Wells Fargo where head and heart were most aligned. When he first bought a 10% stake 33 years ago, Buffet praises “the high-yielding, superbly run banking operation,” but the bank also reflected Buffett’s artisanal charm.
Although it later became the largest bank in the world by market capitalization, Wells avoided large-scale expansion outside the United States. Sticking to consumer and commercial loans, Wells declined to expand or acquire a major investment bank.
There were other less obvious links. Longtime Wells chief executive John Stumpf was playing bridge with Buffett’s younger sister, Bertie.
In 2009, buffet said of the bank: “If I had to put all my net worth in one stock, it would be the stock.”
But now he has none.
Berkshire began trimming its stake in Wells in 2017 and revealed in a filing this week that it had exited the entire position and made a new investment in Citigroup.
The constant narrative is that Wells has lost his moral compass, betraying the trust Berkshire has placed in the bank for so long. What if it was actually Berkshire that had changed?
Buffett used to praise Wells for acting more like Walmart than JPMorgan Chase. “Wells just has a completely different attitude,” he once told Fortune. “That’s why [then chair Dick] Kovacevich calls them “retail stores”. He doesn’t even like the word “bank”.
Wells was famous for “cross-selling” – walk in to open a checking account but also walk away with a credit card or car insurance. Yet it turned out that one of the reasons Wells was so much better than the competition was because it was opening millions of accounts without customers’ permission.
The result scandal in 2016 cost billions of dollars in penalties, imposed a sizable cap on regulators and ultimately led to the departure of two successive chiefs.
Now affinity has been replaced by antipathy. In 2020, Buffett’s partner Charlie Munger, vice chairman of Berkshire, called “scandalous” the decision of new Wells chief Charlie Scharf to continue living in New York rather than move to the bank’s headquarters. in San Francisco.
(Munger has strident opinions about people’s living conditions. He donated $200 million to a new student dorm in Santa Barbara on the condition that most rooms have no windows.)
Still, it’s unclear why Wells is still in the trash six years after the fake accounts scandal broke. Some customers suffered but the scam was mostly a ruse to achieve internal sales targets. Other banks have committed far worse crimes but do not have their size limited by regulators.
More perplexing is why Berkshire has dumped Wells now. Buffett collected his 10% stake in 1989 and 1990 for $290 million. It was worth around $20 billion when Berkshire made most of its sales. Including dividends, the yield comfortably exceeds the S&P 500.
The stock has not recovered to pre-scandal levels, but the bank continues to generate strong earnings, with a credible return on equity of 12%. When regulators finally loosen their grip, Wells will have the opportunity to flex its muscles and generate growth alongside attractive earnings.
Citi, on the other hand, is not your typical Buffett-shaped bank. It has tended to favor large US-focused institutions such as Bank of America and US Bancorp. Citi is a highly international, crash-prone business dependent on a mercurial debt-trading operation. It employs thousands of investment bankers, or “money shufflers” as Buffett dismissively calls them.
It’s not unheard of for Berkshire to make a sudden change. Buffett avoided most tech stocks until 2016 when Berkshire started buying Apple; it is now the dominant security in the portfolio.
But trading Wells Fargo for Citi? It’s like the teetotal Buffett swapping his Cherry Coke for Jack Daniel’s.