Yeah, so what am I thinking? Am I some kind of DGI wuss?
WFC is Uncle Warren approved with a DGI community stamp of approval.
To the first point, yes, you can’t compete with the “Warrenator.” Yet to this point ironically check out what Warren said himself at 26:10 in a recent talk with Indian business school students as what he believes is the most important quality to be a great investor:
[youtube id=”4xinbuOPt7c” width=”600″ height=”340″ position=”left”]
(Worth watching the whole thing, but the tl;dr version is – It’s the ability to ignore what other people think. So I think that even applies to listening to the greats like Warren.)
To the point about WFC having the DGI community stamp of approval, that doesn’t mean very much to me, and it shouldn’t to you either. I’ve seen the DGI “accepted wisdom” fall flat on its’ face with picks like KMI in the 40s last year.
So in this post what I’m going to do is give a quick run down of the trade, and my rationale.
On 7/5/16 I sold all of my 42.316 shares of WFC for $1,974.04. In all, I realized a loss of $457.96 on the trade.
Here’s my thinking:
1. I feel 100% confident about all my positions that I currently hold. It’s important for me to have a few good ideas, versus a ton of ok ideas. The more I study, the less I like financials. Is it possible that WFC will work out brilliantly for other investors? Sure. But there’s a lot of risk here, and I don’t think dividend investors are being adequately rewarded for the risks inherent within the space.
2. What risks? Well, there’s a lot of uncertainty in the world right now. Banks are the only industry that when people lose confidence, the company simply ceases to exist. It’s called a bank run. And before you pooh pooh banks just evaporating, turns out it happens with regularity, at least 3 times in the last 30 years, most recently in 2008 which toppled Lehman Brothers, Bear Stears, WaMu, Wachovia, among others. WFC came out ok, but it too had to cut it’s dividend in 2009.
3. It’s nearly impossible to assess the attractiveness of the dividend strength of a banking stock. Since banks require money to make money, cash flow analysis is nearly impossible. What determines dividend strength (the ability to pay and grow dividends) is not past performance but future cashflow minus debts in the future. Whereas a general company relies on operating assets like property and raw materials to drive revenue to drive cashflow, banks require cash. So it’s pretty hard to understand the safety of the dividend at a bank.
4. In the spirit of preventing another great recession type catastrophe, the Federal Reserve runs stress tests. Turns out the credit card companies – American Express (AXP), US Bancorp (USB), among others can handle adversity the best. WFC? Not so much – had some of the worst results. So there’s a disconnect here from what I can see. WFC is currently priced as a premium company, when in fact it no longer is.
So that’s it. If you own WFC, chances are you could do just fine. I’m not trying to convince anyone of anything, just putting out my thinking in the hopes of learning from the choices I make & making more thoughtful decisions.
For me, I just want to feel confident in all my holdings, and right now I see financials, and WFC as being far too much risk in this crazy, unprecedented time we find ourselves in currently, with not enough compensating reward. And risk vs reward is what intelligent decisions come down to in the end.
What about you? Do you agree/ disagree? Have I completely lost my mind?
Thanks for reading!