You are a den of vipers and thieves! I intend to rout you out, and by the grace of the Eternal God, will rout you out! – Andrew Jackson to the 2nd Federal Reserve
This article is less an inditement on WFC as an investment and more of an inditement on me as an investor. If you told me that WFC’s share price had tripled in the next few years, I wouldn’t be that surprised. So why then did I sell the stock? Well first, we need to understand why I began buying the stock in 2013.
Why I began buying in 2013
1. Wells Fargo Behaved Conservatively Through the Financial Crisis
While other large banks were caught with their dick in their hands, WFC ran a relatively tight ship. Federal Reserve had to force them to take TARP money — or so they say. That’s important because any investment in a financial institution requires a great deal of trust because their balance sheets are both opaque and central to their valuation. Which is a shitty combination.
2. Banks Have Federally Endowed Attractive Economics
You buy money from the Fed at one price and turn around and sell it to the American tax payer at another. That’s a pretty good deal. And large banks enjoy certain scale advantages that smaller institutions do not. One of which is the unofficial guarantee by the Federal government that they will get bailed out, i.e. too big to fail.
3. Banks Have High Switching Costs
In other words, once you have your mortgage, brokerage account, credit card, checking, auto-payments, etc set up with a bank, it becomes a pain to move to a different one. For what? A few basis points of interest? It’s typically not worth it.
4. Banks are a Natural Hedge Against Rising Interest Rates
Banks’ net interest margins get squeezed in a low interest rate environment. Banks pay you one rate on your deposits and a higher rate on your loans. But interest on deposits has a theoretical lower bound of 0% — assuming retail customers would rather keep their money under mattresses than get charged a negative interest rate. So banks actually prefer higher interest rates for wider spreads and wider margins.
5. Warren Buffett
Fine, fine. I’m a little embarrassed to mention this, but if I’m being perfectly honest, I have to admit that Warren Buffett’s seal of approval on Wells Fargo was also a factor in my purchase. Only a few years ago, he named Wells Fargo as his favorite stock — aside from Berkshire I’d imagine.
6. I Banked With Them Since 2005
And I knew their employees to be relatively competent — save for the ASU branch naturally.
7. It Was Cheap
At a price-to-book below 1.5 and a return on assets of about 1.2%, I figured I was getting a good deal based on what little I know about valuing banks.
I’m not saying those are the 7 best reasons to buy a stock, but I don’t think they’re among the worst either. Let’s go through them now with the advantage of hindsight.
Why I sold in 2020
1. Wells Fargo Now Behaves Like a Den of Vipers
Wells Fargo’s incentive program was so demanding that financial advisors were opening up millions of fraudulent accounts to meet their quotas. Then management covered it up. When the news broke in 2016 and investors asked if there were any more scandals in the pipe line, CEO John Stumpf said no. While he literally had another lawsuit sitting on his desk. He was fired the same year.
I actually bought the stock heavily during the scandal, figuring it was a temporary issue. Well it’s been 4 more years and Wells Fargo can’t seem to keep itself out of the news. This may seem like a small point, but if you look through the comments on any of their promoted tweets, you’ll find nothing but vitriol. I understand it’s the internet, but I imagine even Monsanto has a better social media presence. But the worst part is that Wells Fargo’s customer service representatives respond to accusations of fraud with a feigned naivety. And that’s a serious issue. The first step towards handling a public image crisis is to admit you have a public image crisis. It’s been four years and their public relations department appears to be using a head in the sand approach to crisis management.
2. Wells Fargo is Still Being Federally Endowed
Right in the ass. The Fed put in place a $1.95 trillion asset cap and have embedded their regulators. I don’t see much incentive for them to lift the cap or retract the regulators. Those with power don’t give it up voluntarily and no politician wants to waste the political capital to force the Federal Reserve’s hand. You may say that I have no idea when the regulations will be lifted — they’ve already been temporarily lifted as of April 10th of this year — and you’d be right. But either way, it’s another reason why I sold the stock.
3. Banks Have High Switching Costs
Which is only a benefit if you’re attracting new customers. Recently, Wells Fargo’s new deposits have grown some 2% while competitors have at some 8-9%. If you go years with competitors stealing market share, then high switching costs actually work against you.
4. Interest Rates Can, Like, Totally Stay at Zero Forever – AOC
Back in 2008, I would have thought that 12 years of zero interest rates, QE, and bailouts would have lead to runaway inflation. Well, yes and no. Yes, we’ve seen inflation in asset prices, but no, we haven’t seen inflation in consumer goods. I won’t get into why, but needless to say, the Federal Reserve is under no great pressure — quite the opposite really — to raise rates.
5. Warren Buffett
Over the last couple years, B-Dog has lowered his stake from 10% to 8% — and no it isn’t to keep from going over 10% due to buybacks. It’s because now he prefers Bank of America.
6. I Banked With Them Since 2005
I still do.
7. It Is Cheap
Their PB is currently at 0.65. Course, their ROA is at 0.2% too…
All in all, I’m relieved to be free of them. Should I have sold them sooner? Of course! All the reasons I’ve listed have been around for quite a while. And selling before an 8th of my portfolio dropped 50% would have been cool. But it’s never too late to make the right decision.
Hopefully next time, I’ll remember that it’s never too soon either. 🙂
-Dan Hansen
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Written in 2020