Warren Buffett has effectively turned his back on an investment in a bank in Wells Fargo that for years was one of his big four cornerstone holdings (IBM, Coca Cola and American Express are the three others).
The four companies accounted for around 60% of Berkshire’s $US140 billion or so investment portfolio. They were not to be sold, but to be added to if value appeared, or sector conditions changed.
Now there are three and the question now must be asked, will Berkshire replace Wells in the four with another ‘anchor’ holding – perhaps by selling off all its Wells stake?
It is a stunning turnaround by the most respected investor and businessman in the US and probably around the world and raises the bar so far as genuine activist shareholders are concerned, not the money grubbers like Elliott which is trying at the moment to get BHP Billiton to stiff its huge Australian shareholder base and those in South Africa.
The impact will be dramatic from the statement from Buffett’s company, Berkshire Hathaway late Wednesday US time (http://www.berkshirehathaway.com/news/apr1217.pdf) that was cutting its stake to well under the 10% level (Berkshire had been Wells’ biggest shareholder for years) and abandoning plans to ask the US Federal Reserve for the greenlight to boost its Wells shareholding past the 10% limit.
After months of saying very little about the behaviour of Wells, its board and management, Buffett has now taken a stand that puts him at odds with the rest of Wall Street.
Most investors take what’s called “The Wall Street Walk” when a company they are invested in does something stupid, wrong or starts losing money – they sell, anonymously. Apart from hedge funds who have a vested interest in talking down shares, big long term investors rarely make their moves public, referring the slow departure via a steady selling effort.
Buffett has chosen a modified version of that – but in doing so he has told Wall Street that Wells Fargo is no longer essential to his huge investment portfolio. In effect he has downgraded Wells Fargo so far as he is concerned and put it on a negative footing (He also controls a big stake in Moody’s remember).
What Buffett is telling Wall Street is that even though Wells Fargo is under new management and with a new look board, it no longer has his confidence. That should make the Wells AGM on April 25 very interesting with a leading corporate governance group advising the bak’s shareholders to vote against all directors, bar the three brought on board since the crisis emerged last September.
Buffett has now gone pubic, explaining why he is abandoning an investment that has been in Berkshire’s portfolio for decades and is worth (before the sales this week) a massive $US26 billion.
Wells Fargo shares lost nearly 2% on a weak day’s trading on Wall Street and is falling back to where it was when the scandal erupted last September. The shares fell their most recent low of $US44.60 in November, two months after the news broke, rose to a peak of $US59.73 on March 1 when all the business enthusiasm about Donald Trump peaked.
They have since fallen more 12% and news of Buffett’s virtual desertion and selling will trigger another slide tonight on the eve of the long Easter break, no matter what the bank says in its first quarter results and briefing.
The most pointed part of Berkshire’s abandonment of Wells was the withdrawal its application for US Federal Reserve permission to boost its ownership stake above 10%. In other words Berkshire wants to limit is association with Wells Fargo to a portfolio investment and has abandoned plans to build its shareholding well into double digit figures.
Berkshire’s (belated?) action is in stark contrast to the way big shareholders in the four major Australian banks have remained shareholders and said nothing about the almost continual list of scandals from the Storm Financial debacle eight years ago, from dodgy financial advice, weak investigations into those claims, abuse of clients by bank insurance companies (especially the CBA’s Comminsure), attempting to fix key market interest rates, overcharging of customers for a myriad of financial products and now questionable home lending, especially the marketing of interest only home loans.
