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Berkowitz1992

Berkowitz1992

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Published by mattpauls
Bruce Berkowitz on Wells Fargo (1992)
Bruce Berkowitz on Wells Fargo (1992)

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Excerptreprintedwithpermissionof:OUTSTANDINGINVESTORDIGEST,INC.14East4thStreet,Suite501New
York,
NY10012
(212)
777-3330
OutstandingInvestor
Digest
PERSPECTIVESANDACTIVITIESOFTHENATION'SMOSTSUCCESSFULMONEYMANAGERS.
Investorsfeatured
in
thisIssue:
BARONCAPITALMGMTSRONBARON...1,38,64LEHMANBROTHERS'BRUCEBERKOWITZ...1,53,64TWEEDY,BROWNE'SCHRISBROWNE,WILLBROWNE,JIMCLARK
&
JOHNSPEARS1,16,64MARKCOOPER1,59,64BAUPOSTGROUP'SSETHKLARMAN...1,10,64PETERLYNCH...1,2,19,64
OtherInvestorsinthisIssue:
BERKSHIREHATHAWAY'SWARRENBUFFETT...8,18,19,53,54,60CARRET
&
CO'SPHILIPCARRET
&
JERRYCARRET...3?,64CUNDILLVALUEFUND'SPETERCUNDILL...
22
SOGENFUND'SJEAN-MARIEEVEILLARD...22,32GRAHAM-NEWMAN'SBENGRAHAM...14,19,61WESCOFINANCIAL'SCHARLIEMUNGER...19SEQUOIAFUND'SBILLRUANE
&
BOBGOLDFARB...18,34SOROSFUNDMGM'T'SGEORGESOROS...19,64MICHAELSTEINHARDT...64TEMPLETONFUNDS'JOHNTEMPLETON...34(and
more.)
Companies
&
InvestmentsinthisIssue
ADEZA...44ADVO...38,40AMERICANEXPRESS...?BANCODESARDEGNA...29,30BANKAMERICA...54,55,568MGROUP...25CAREMARK...43,44,48CAPSTEADMORTGAGE8CENTRALCOOPERATIVE8CHRYSLER...8CIBA...33CIRCUSCIRCUS...38CITICORP...8COCA-COLA...6COLONIALGROUP...8COMPAGNIED'INVESTISSEMENTDEPARIS31DANZAS22DEERE9DEVRY51DUPONT
?
EASTMANKODAK...
?
ESCOELECTRONICS...14FANNIEMAE...8,62FILENE'SBASEMENT...38,39FIRSTINTERSTATE...54FORD...8FREDDIEMAC...8,53,62,63GM...
8
HEALTHDYNE...43,44,48,49IBM...
?
INDOINTL...23,24ING...26.2?,28,.31INTLGAMETECH...38JOHNWILEY...38,40KEMPER...8LACONCORDE...31,32LINDTANDSPRUENGLI...22MANORCARE...39,40,49,51MARRIOTT...?MIRAGE...38MOULINEXD'ESPANA...32,33NESTLE...
22,
33NORTHSIDESVGSBANK...8OFFICEDEPOT...39,45,52PIERONEIMPORTS...8RAGSHOPS...9SAFEGUARDSCIENTIFICS15SALLIEMAE8SALOMON...53.63SEARS...
?
SUPERCUTS...
9
TOKOSMEDICAL...38,40-52WAL-MART...18,20,21WELLSFARGO...
8,
53-63WESTNEWTONSVGSBK...
8
WESTINGHOUSE...9XEROX...
?
ZEHNDERHOLDINGS...28(and
more.)
VolumeVIINumbers9
&
10November25,1992
PETERLYNCH,FORMERLYOFFIDELITYMAGELLAN,
&
BAUPOSTGROUP'SSETHKLARMAN"GUESSWHAT?WEALWAYSMAKEITOUTOFRECESSIONS,BUTBEWARETHEREARVIEWMIRROR."
Beforeretiringin1990
1:0
spendmoretime
with
familyandotherinterests,PeterLynchdirectedFidelityMagellantothebestrecordamongallmutualfundsfortheprecedingdozencalendaryears-compoundingshareholderequityatover30%peryear
vs,
16.7%fortheS&P500.We'repleasedtobringyouthefollowingcommentsby
(continuedonpage2)ANOlDINTERVIEWWITHTWEEDY,BROWNE'SCHRISBROWNE,WILLBROWNE,JIMCLARK&JOHNSPEARS"WE'REFINDINGOPPORTUNITIESABROAD.IT'SLIKE1974OR1982ALLOVERAGAIN...."
AsoneofWarrenBuffett's"SuperInvestorsofGrahamandDoddsville."Tweedy,Brownehasatrackrecordtomatch.Forexample,duringthe
33
yearsendedDecember31,1991,
TBK
Partnersachievedacompoundreturnof19.7%peryearversus10.5%peryearfortheS&P500.Interestingly,theiroccasionalforayintonon-U.S.stocksfrom1983to1991wasevenmorerewarding-withtheiraverage
return
onthosestocksapproximately31
%
peryear.
(continuedonpage16)BARONCAPITALMANAGEMENT'SRONBARON"ILOVETOUNDERSTANDWHATMAKESBUSINESSESTICKANDTOKOSMEDICALISQUITEATiCKER...."
RonBarbnfoundedBaronCapitalManagementin1983-theyearsmall-capstocksbeganastintinthedoghouse.Despitethatunfortunatecoincidence,however,andwhatBaronterms"theworstyearofhiscareer"in1990,he'sstilloutperformed
all
ofthemajorindices-earningacompoundannualreturnof17.8%versus11.1%fortheRussell2000and17.2%forthe
S&P
500.Unauditedreturnsforhismanagedaccountsgoingback
(continuedonpage38)BRUCEBERKOWITZANDMARKCOOPERWELLSFARGOREVISITED"APHENOMENALCASESTUDY-THENUMBERSARERIGHTOUTONTHETABLE...."
Inpastissues,we'vebroughtyoucontributorspoundingthetableonWellsFargo-RobertNodinOctober1990(at$41)and,morerecently,BruceBerkowitzinNovember1991(inthemid-$60s).
Therefore,
whenWells'stockpricerecentlyretreatedbacktothernid-$60s(infact,
it
gotto$61-1/4)andBuffettreportedcontinuingpurchases,wethoughtyoumightenjoyanin-depthupdateonthecompanyanditsprospectsfrom
(continuedonpage53)
©19\12OUTSTANDINGINVESTORDIGEST,INC.,14EAST4THSTREET,SUITE
SOt
NEW
YORK,
NY
10012(212)
777-3330
 
November25,1992
OUTSTANDINGINVESTORDIGEST
Page53
WELLSFARGO(cont'dfrompage1)
twocontributorswhoseviewswe'vefound.conststentlyonthemarkwho'vestudiedWellsandmade
it
acoreposition,First,BruceBerkowitzisa
flnancial
consultantandportfoliomanageratShearsonLehmanBrotherswho'srungthebellatappropriatetimesinthepastforSalomon,FreddieMacandFundAmerican-forall
the
rightreasons.And,incidentally,hisunauditedtrackrecordreflects
it.
Mr.Berkowitz'sviewsarenotnecessarilythoseofhisfirm.Youreditorconsistently
find
hisviewsbothworthwhileandentertatning.Andwehopeyouwill,too:
ICANSEEWELLS'FUTURESOCLEARLY:A
$200
TO$300STOCKWITHINSEVERALYEARS..",
OID:Lastyear.youtold
us
thatWellsFargo
wasa
screaming
bargainin
the
mid·$60s.
It's
backin
that
price
range.Are
you
buying
it
again?
BruceBerkowitz:Sure.And
if
it
keepsdeclining,
I
maymakeitmyonlyposition.It'sabsolutelyincredible.
OlD:
So
you
think
it's
a
bargain.
Berkowitz:
How'd
youknow?
OlD:
Call
it
intuition.Why
do
youlike
it?
Berkowitz:
I
cansee
it
at$200or$300ashare.
OlD:
One
ofthebetterreasons-
if
you'reright.Butduring
our
lifetime?
Berkowitz:Absolutely.I'mstartingtofeelaboutWellsthewayIfeltaboutSalomonat$21,FundAmericanat$30andFreddieMacat$11or$12.Andyouknowwhatthesignis?Thegreatestsignintheworldiswheneveryoneagrees.buttheythinktheycancallthetum.AlotofpeoplethinkthattheycandothatwithWellsFargo.That'swhythey'renotthere.LotsofpeoplearebullishonWellsFargolong-term.Butlotsofthemaregoingtowakeuponedayandjustfindthattheymissedit.Ofcourse,someonewho
is
thereisWarrenBuffett.Iseethatheboughtsomethinglike550,000moresharesatanaveragepriceof$66.
OlD:
Howbig
a
position
is
it
for
you
right
now?
Berkowitz:It'snearly33%ofmyliquidnetworth.Andatcost,it'sthebiggestpositionI'veeverhad.Let'sjustsaythatI'mnotfoolingaroundhere.I'rnjustsofocusedonWellsFargo.Ihaveconsultantsworkingonitandpeopledoinginvestigativework.AndasI'mbuyingandbuying,Ijustdesperatelywant.someoneusingfactualinformationtotellmewhyI'mwrong.
OlD:What'sthemostyou'vepaid?
BerkOwitz:I'vepaiduptothelow$70s.AndI'mbuyingitfornewclientstoday.I'dliketoseeitgetalittlecheaperbeforeIaddtoexistingpositions.ButI'llbethere.And
I'm
atthepointnowwhereI'llevensellotherposttions.
OLD:
You
sound
prettyserious.
Berkowitz:I'mtalkingwithmyclients.WhenWellsgetsbetween$200and$300ashare,we'regoingtohaveaparty.AndIthinkSouthernCaliforniawouldbeanappropriatelocation.
OID;Whatsortoftimeframeareyoucontemplating?
Berkowitz:Withinseveralyears.
I
canJustseeitsfuturesoclearly.
APHENOMENALCASESTUDY:THENUMBERSARERIGHTOUTONTHETABLE..__
Berkowitz:WellsFargowilldeterminewhetherIhaveanycompetenceininvestingornot..Wellsisthewatershed.What'sincredibleaboutWellsisthatitisn'tdependentonanyproprietaryinvestigativeworkorkeensenseofanalysis.Thisisstrictlyabusinessman'ssense.You'retalkingearningsflows.You'retalkinghumannature.You'retalkingabout"Thistooshallpass."You'retalkingabout'TheangelsfalLAndthosethatarefallenshallriseagain,"andhumanemotionandbusinessandcyclesandhowequtlfbriumschange__
OID:Andhere
I
thoughtwewerejustplayingwith
little
piecesofpaper.
Berkowitz:What
I
meanisthatalloftheinformationisoutintheopen.Andyetthereareverysmartpeopleallalongthespectrumoftheargument-allthewayfromextremepessimismtoextremebulltshness.Verysmartpeoplearebuyingit.Verysmartpeoplearesellingitshort.Andthere'sevenamuchlargerverysmartgroupofpeoplewhoarestayingaway.Itisn'tasifIknowsomethingsomeoneelsedoesn't.It'saclassicdoordiestruggle..Thenumbersarerightoutonthetable-ontheenvironment,theindustryandthecompany.Andpeoplearemakingbusinessdecisions.That'swhyformeWellsissuchaphenomenalcasestudy.
OlD:
After
a
builduplikethat,wehave
to
ask
you-what'syour
rationale?
Berkowitz:It'sasimplecaseofabankwithtremendousearningspower.Andasabusinessman,I'vegoneinto
it
thewaygoodbusinessmengointobusinesses-inrecessions-becausethat'sthe.timetodoit.Theargument'ssimple.Wellshashadfantasticearningpowerinthepast.AndIjustdon'tseeanyreasonwhyitwon'tcontinue.Infact,it'sgrowing.
Its
earningpowerhasbeendisguisedbytheintenseprovisioningforloanlosses.Butwhentheprovisioninggetsbacktoanormallevel,you'llstarttoseethatincredibleearningpowercomedowntothebottomline.Andit'sassimpleasthat.
BANKINGONTHEBRINK
FLAWED-ANOUOF·DATE,STATICANALYSIS..__
OlD:
But
as
you
mentioned.
noteveryoneagrees....
Berkowitz:Youcouldsaythat.Forexample,
Banking
on
theBrink
isa,388-pagestudydonebyanacademicandaconsultantconcludingthat2,000banksarebasicallybust.Itseemslikeeverybodyistalkingaboutit.
(continuedonnextpage)
Reprintedwithpermission.©1992OutstandingInvestorDigest,Inc,'14East4thStreet,Suite5.01'NewYork,NY100[2'(2[2)777·333.0
 
Page54
OUTSTANDINGINVESTORDIGEST
November25,1992
WELLSFARGO(cont'dfromprecedingpage)
Ineffect,theyconcludedthat!Tbankshadtoclosedowntomorrow,there'dbesignificantequityshortfalls.AndWellsFargowasoneofthosebanks.
DID:
It
sounds
likeyoudisagreewiththeconclusion.
Berkowitz:Idon'tunderstandalltheirassumptions.However,it'sbasicallyastaticanalysis.Thenumbersarebasedonend-of-year1991-andhavealreadychangeddramatically.WellsFargo'scapitalratiosareupSignificantly.Andthey'reupdespitebothloanlossprovisionsandnon-performingloansasapercentageoftotalloansbeinguptremendously,aswelLThenumbersaremuchbetterthantheywereatyear-end1991.Sothewholestudy'sbasedonanout-of-datesnapshot.Inaddition,itdoesn'ttakeintoaccounttheirdynamicsandtheirearningspower.
EVENTUALLYHALFOFWELLSWON'TBEABANK.ANDIT'LLBETHEDARLINGOFWALLSTREET....
DID:Whywould
dynamics
andearningpower
bea
plusforbanks?Aren'ttheylousy
businessesatbest
anddinosaurs
at
worst?
Aren'tmoney
marketfundsand
CMAs
making
them
obsolete?
Berkowitz:WellsFargo'smaking
themselves
obsolete.Theonlyreasonwhytheiremployeecountisup200isthatthey'vehired200personalfinancialofficerstoselltheirfundsandtheirothernewinitiatives.They'removingsomethinglike$20millionaweek-abilliondollarsayear-frompassbookaccountsintotheirmutualfunds.
DID:That's
a
plus?Their
primarybusiness
is
aU
butobsolete.Andthey'regoingintoa.new
business
wherethey'reunproven?Thatsounds
more
likesomethingtheshortswould
be
saying.
Berkowitz:Don'tforgetthatWells'indexbusiness'maybethelargestinthecountry,Theysoldhalfof
it
toNikko.They'renotschmoesinthisbusiness..Andthey'rekickingbuttontheirmutualfundsnow.They'requitehappywiththeprogressthatthey'remaking.TheycouldbecometheDreyfusoftheWestCoast..Eventually,halfofWellsFargowon'tbeabankIt'llbeamoneymanagementoperation.
DID:
Because
the
moneymanagementoperation
grows
orbecause
thebankgetswipedout?
Berkowitz:It'sgrowinglikeaweed.It'llbeatremendousretailoperation.Let'sfaceit.Thecommercialrealestatebusinessisn'tgoingtocomebackforalongtime-eveniftheywantedtolendoncommercialrealestate.Sobothrelativelyandabsolutelyspeaking,Wells'moneymanagementoperationswillgrow.Andyouwatch-inthreetofiveyears,WellswillbethedarlingofWallStreet.
DID:Does
a
vividimagination
runin
yourfamily?
ABANKTHATHASAFRANCHISE?THISONEPRINTSMONEY....
011):But
aU
ofthat's
mostly
inthefuture.Today,Wells
is
prirnarilya
bank.
Isn'tthatbadnews?
Berkowit~:Manydon'tthinkWellshasafranchise.ButIthinktheydo.
DID:
Isn't
thatacontradictionin
tenns-abank
withafranchise?
Berkowitz:DoyourememberBuffett'sdefmitionofagreatfranchise?Withhischoiceofmanagementandabillionbucks,hecouldn'tputadentinitsfranchise..IfIgaveyouabillionbucksandletyoupickyour.managementteam,howcouldyourationallyhurtWells?
DID:There'sonlyonewaytojind
Ol.4t.
Berkowit~:Everyonethinks.it'safranchisenotworthhavingtoday.Andevenifsomeonedidwantafranchise
in
California,whatcouldtheydo?HowcouldtheycompeteagainstWellsFargo?It'sjustsoentrenched,There'saBankAmerica,WellsFargoandFirstInterstateonalmosteverycomer.Whatbankinitsrtghtmindwouldeven
try?
Soyou'renotlikelytohavenewcompetitorsbecausenobody'senteringthisgame.
DID:Youcouldprobablysaythe
same
thingaboutdefense
companies.
Maybethey'rejust
smart
notto.
Berkowitz:Maybeso.ButWellsisatremendousmarketingorganization.Theirbranchesareconvenientlylocated.They'reefficient.Andthey'rethelow-costoperator.We'realsotalkingaboutabusinessthat'llbeearningwellover20%on.equitywhentherecessionfinallyends.
DID:
if
theysurvive
it
andyoulivelORgenough.
Berkowitz:Also,it'sanoligopoliSticsetting.BankAInericadidWellsFargoagreatfavorbytakingoutSecurityPacific.
DID:EliminatingthetemptationforWells
or
what?
Berkowitz:SecurityPacificwon'texistanymore.SoBankAmericawillreducethenumberofbranches.PeoplewhousedSecurityPacificasanoffsettoBankAmericawillhavetouseWellsFargoorFirstInterstate.
DID:
An
offset?
Berkowitz:Peoplesometimeswanttoavoidhavingonlyonesupplier.Basically,customerscangotooneofthreeplaces-BankAmerica,FirstInterstateorWells.There'llalwaysbecommunity-typebanks,creditunions,S&Lsandsoforth.Butnoone'sgettingintothisbusiness.Andeveninanoligopoly,Wellsshouldbeabletoprintmoney.
DID:
Tellthat
to
the
airlines.
IFMYNUMBERSAREEVENCLOSETOCORRECT,WELLSFARGOISVERY,VERYCHEAP....
Berkowtiz:Wellsisprintingmoney
now.
Lookattheirnetinterestmargin.It'sover5-1/2%.Andpeoplearesaying,"Oh,itcan'tlast.They'remakingafortuneoffthegovernmentrightnow.".andsoforth.Butthey'vehadanincrediblenetinterestmarginthelastfiveyears-over5%.There'snoreasonwhytheyshouldn'tbeabletostayaround
(continuedonnextpage)
Reprinted.withpermission,©1992OutstandingInvestorDigest,Inc.'14East4thStreet,Suite501·NewYork,NY10012·(212)
777-33'30

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