Warren Buffett’s Recent Comments on IPOs, J.P. Morgan Chase, and Wells Fargo
At the Berkshire Hathaway (BRK.A)(BRK.B) annual meeting on May 5, 2012, Warren Buffett stated that Berkshire has not bought an IPO in 30 years. IPO’s come to the market when the sellers want to sell. He added, it makes no sense to spend five seconds on a new issue. “The idea that a new issue is going to be the cheapest thing to buy among thousands of stocks is crazy”. This sage advice provided a clear warning to potential investors in the highly publicized Facebook (FB) IPO on May 18. Facebook has declined 25% from its IPO price of $38.00 to its closing price on June 14 of $28.29.
With respect to U.S. banks in general, and J.P. Morgan Chase (JPM) and Wells Fargo (WFC) in particular, Buffett made several comments at the Berkshire annual meeting. He noted that U.S. banks are in far better position than they were a few years ago. They have taken many of their abnormal losses and buttressed capital in a big way. The U.S. banking system “is in fine shape”. By contrast, the European banking system “is gasping for air”. Overall, the TARP policy was very sound for the U.S. “The Federal Reserve and Treasury acted very responsibly”.
Previously, Warren Buffett had mentioned that he owned shares of J.P. Morgan in his own account, but it was not part of Berkshire’s portfolio. When asked to explain this distinction at the annual meeting, Buffett replied that he likes Wells Fargo more than J.P. Morgan. But since Berkshire owns shares in Wells Fargo, he cannot buy it for his own account. So, he bought shares of J.P. Morgan as a second choice. His “best ideas are held by Berkshire”. He likes J.P. Morgan, but he knows Wells Fargo better and thinks it is easier to understand. (Berkshire added to its Wells Fargo holding during the first quarter, last year, and in many recent years. Berkshire has invested in Wells Fargo for over 20 years, and Wells Fargo currently represents Berkshire’s second largest holding, with a value of $12.5 billion.)
Just five days after the Berkshire annual meeting, on May 10, Jamie Dimon, J.P. Morgan’s highly regarded CEO, revealed the loss of at least $2 billion as a result of an unsuccessful hedging strategy. J.P. Morgan’s shares have declined from $40.74 prior to this announcement, to $34.65 (closing price on June 14), a decline of 15%. By contrast, the S&P 500 has declined by only 2% over this time period. Warren Buffett also noted at this meeting that “The CEO should be the chief risk officer”, a statement that in retrospect would clearly apply to Jamie Dimon.
As a result of Warren Buffett’s prescient statements relating to IPO’s and J.P. Morgan, it is no wonder that Berkshire Hathaway has performed so well under his stewardship over the past 47 years. As he mentioned at the Economic Club of Washington on June 5, 2012, $10,000 invested in the Buffett Partnership in 1956, would be worth $500 million today. That represents a compounded rate of return of 21.3% over the past 56 years. (By contrast, $10,000 invested in the S&P 500 at the same time, would have resulted in a current value of $2 million, representing a compounded rate of return of approximately 10% with dividends included).
Warren Buffett mentioned on several occasions at the annual meeting, that he would repurchase shares of Berkshire if they were priced below 1.1 times book value. With these shares currently trading at less than 1.2 times book value, they are attractively priced. He stated both at the annual meeting and at the Economic Club of Washington, that the intrinsic value of Berkshire is well above its book value.
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