In an interview with Becky Quick of CNBC’s “Squawk Box” on Monday, Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) Chairman and CEO Warren Buffett (Trades, Portfolio) discussed the insurance conglomerate’s long-held stake in Wells Fargo & Co. (WFC, Financial), which it has been trimming over the past several quarters.
In the fourth quarter, GuruFocus data shows the Oracle of Omaha’s company dumped 55.15 million shares of the San Francisco-based bank, bringing its total position down to 323.2 million shares. The stock traded for an average price of $52.48 per share during the quarter.
Despite the reduction, Wells Fargo remains the fifth-largest holding in the firm’s $242.5 billion equity portfolio with a weight of 7.18%. GuruFocus estimates Berkshire has gained 120.76% on the investment since the first quarter of 2009.
With a $191.8 billion market cap, shares of the bank were trading around $46.45 on Tuesday. GuruFocus estimates the stock has fallen 20% over the past three years.
In general, Buffett said during the interview that banking is a good business if “you don’t do dumb things on the asset side.”
Wells Fargo falls into this category. Since 2016, it has been suffering from the effects of a scandal related to employees opening millions of fake accounts to meet incentive requirements. On Friday, the bank settled with a number of the regulatory institutions that were investigating the situation for $3 billion.
While he doesn’t know any of the particular details regarding the settlement, Buffett said Wells Fargo is “classic in terms of one lesson,” which is the company should have addressed the problem “immediately.”
“You can cause people to do the wrong thing because they will do what they are incentivized to do,” he said. “They obviously had a very dumb incentive system; people started playing it various ways, and the big thing is they ignored it when they found out about it. I mean, you are going to do dumb things in business, we do them every day, but you absolutely have to attack a problem as soon as it occurs and you know about it. If that had happened, Wells Fargo shareholders would be a lot better off.”
As a result of Wells Fargo’s inaction, Buffett said shareholders are now paying the consequences several years after the fact. He did clarify, however, that the effects of the scandal is not specifically why Berkshire has been whittling down its position in the stock.
Overall, he said he feels good about the banks Berkshire owns. Other major bank holdings in the equity portfolio are JPMorgan Chase & Co. (JPM, Financial), U.S. Bancorp (USB, Financial), PNC Financial Services Group Inc. (PNC, Financial), M&T Bank Corp. (MTB, Financial) and Bank of America Corp. (BAC, Financial), three of which are among his top 10 holdings for the quarter.
According to the GuruFocus Industry Overview chart, they are also among the largest U.S. banks.
In his annual letter to Berkshire Hathaway shareholders, which was released his past weekend, Buffett noted that the companies in the portfolio are not a “collection of stock market wagers” that will be eliminated “because of downgrades by ‘the Street,’ an earnings ‘miss,’ expected Federal Reserve actions, possible political developments, forecasts by economists or whatever else might be the subject du jour.”
“What we see in our holdings, rather, is an assembly of companies that we partly own and that, on a weighted basis, are earning more than 20% on the net tangible equity capital required to run their businesses,” he wrote. “These companies, also, earn their profits without employing excessive levels of debt.”
Watch the full segment below.
Disclosure: No positions.
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