Investment is largely about identifying companies with trustworthy and capable management.
But that is easier said than done, as we can tell from the scandal of Wells Fargo, the second largest listed company in the portfolio of billionaire investor Warren Buffett.
The US bank has been caught opening more than two million fake bank and credit card accounts for customers without their consent over the past five years in order to earn more fees.
Buffett’s investment flagship, Berkshire Hathaway, started to buy into the bank in 1989 and has been adding to its positions over the years.
At present, Berkshire owns about 10 percent (worth more than US$21 billion) of the bank and is its largest shareholder.
Buffett is known for his emphasis on a business’s so-called “moat”.
He likes businesses with a strong entry barrier so much so that even an idiot can run them. But in fact, he also cares a lot about the quality and integrity of a firm’s management.
Buffet does not take board seats in the companies he invests in, but he would make careful background checks of their management before making any heavy bet.
That’s one of the key reasons he has been delivering a stellar investment performance over the decades.
Former Wells Fargo chief executive John Stumpf and other top officials of the bank are reportedly very close to Buffett.
Ironically, Wells Fargo’s malpractices have been going on for years despite Buffett’s watch and repeated praise of the bank ‘s management.
Wells Fargo is now facing steep fines from US regulators.
Since the 2008 financial crisis, many banks have suffered huge losses from subprime loans.
The industry also has to cope with rising compliance costs as authorities require stringent implementation of customer relationship rules and anti-money laundering regulations.
However, Wells Fargo has bucked the industry trend and appears to be one of a kind.
Its share price had surged more than 50 percent by September since late 2008 and generated a whopping return above 100 percent including dividends.
The bank’s market value soared to US$250 billion by September, making it the world’s most valuable bank.
It has been widely believed that Wells Fargo stood out from the crowd because of its prudence, in ways like insisting not to sell products management doesn’t understand.
Sadly, the fake account incident revealed the dark side of Wells Fargo’s “success”.
Senior management reportedly learned about the fraud years ago but decided not to do anything about it for the sake of sustaining its robust earnings performance.
This article appeared in the Hong Kong Economic Journal on Oct. 18
Translation by Julie Zhu
[Chinese version 中文版]
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