Over the past few years, I've noticed an interesting divergence has emerged in Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio)'s portfolios.
The two billionaire investors work side-by-side at Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), but Buffett has ultimate control over the conglomerate's giant equity portfolio. Buffett has said that he consults right-hand man occasionally on positions, but both partners have also admitted that they've disagreed on some holdings.
In the past few years, the two investors have notably had very different views on banking giant Wells Fargo (WFC, Financial).
Long-term holding
Buffett's association with the lender goes back decades. In 1989 and 1990, a downturn in California real estate prices hit the bank's income and market sentiment rose against the business. However, Buffett thought the market was too short-sighted. He acquired a 10% interest in the bank at a discount price. Buffett explained his investment in his 1990 letter to shareholders:
"Our purchases of Wells Fargo in 1990 were helped by a chaotic market in bank stocks. The disarray was appropriate: Month by month the foolish loan decisions of once well-regarded banks were put on public display. As one huge loss after another was unveiled -- often on the heels of managerial assurances that all was well -- investors understandably concluded that no bank's numbers were to be trusted. Aided by their flight from bank stocks, we purchased our 10% interest in Wells Fargo for $290 million, less than five times after-tax earnings, and less than three times pre-tax earnings."
Berkshire held a position in Wells for the next few decades. In early 2017, the group owned 480 million shares. But then, the fake account scandal broke, and Buffett started to sell. Berkshire has since reduced its holding to just 52 million shares.
Munger and Wells
Munger started buying Wells Fargo later. Using $20 million parked in Treasury bonds at his business, the Daily Journal Corporation (DJCO, Financial), Munger started buying shares in the bank and three other firms at the height of the financial crisis. The firm acquired just under 1.6 million shares in Wells at prices of around $5 per share.
Unlike Berkshire, Munger hasn't sold any shares in the bank since 2017. The divergence in trading strategies is interesting considering the similarities and close working nature of the two investors.
At this year's Daily Journal annual meeting, one shareholder wanted to know why Munger had taken a different approach. The billionaire responded by saying that "Warren got disenchanted with Wells Fargo" after its accounts scandal. He went on to add, "I don't think it's required we be the same on everything," referring to his decision to keep the stock and Berkshire's decision to sell.
He didn't deny that the bank had given its investors a reason to sell. "There's no question about the fact Wells Fargo has disappointed long-term investors like Berkshire," said Munger. He went on to add that the "old management" made mistakes, although they were not "consciously malevolent or thieving but had terrible judgment in creating a culture of cross-selling." This was a "big error of judgment" and ultimately led to Buffett's disappointment with the bank.
Munger said he was a "little more lenient" when it came to evaluating management, and he expected "less out of bankers" than Buffett. "The kind of executives that have a Buffett-like mindset that never get in trouble are a minority group," he added, noting that there are so many banks in the country it would be impossible for them all to have high-quality managements. "There's a lot of temptation to do dumb things, which will make the earnings next quarter go up, but are bad for the long term," he said. "Some bankers yield to the temptations."
Disclosure: The author owns no share mentioned.
Read more here:
- Warren Buffett on the Difference Between Price and Value
- Graham and Keynes: Challenge What You Know to Grow
- Seth Klarman: Why Value Investing Works
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