Mr. Market Versus Mr. Buffett: Who Wins?

In arguing that Warren Buffett should not repurchase shares of Berkshire Hathaway (NYSE:BRKB), a Tuesday article on the financial blog The Brooklyn Investor makes an important differentiation between how “Mr. Market” and Mr. Buffett regard investments, particularly those in banking stocks.

Mr. Market does not see a future for the banking industry: their stocks are too volatile, they need higher capital requirements, heavier regulations have piled on pressure, and top-line growth does not seem to be forthcoming.

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Wells Fargo (NYSE:WFC), a stock that Buffett has held for many years, is used as an example. The bank saw its stock price plummet from $40 per share to less than $10 during the financial crisis, which Mr. Market saw as a big issue. Furthermore, because of its institution’s size, Wells Fargo now has little room for growth. Add “too complex,” “too opaque,” and “too leveraged” to that list, and the company looks even less of a profitable investment to Mr. Market.

But Wells Fargo has posted some impressive numbers recently. Since 2002, its basis point growth has topped 10 percent every single year and 15 percent every year except in 2011. As The Brooklyn Investor notes, this explains why Buffett has not bought back more shares of Berkshire. “For years, Berkshire Hathaway fans have been calling for share repurchases and dividends and things like that,” the author wrote. But “he sees something better.”

Buffett has observed that Wells Fargo’s BPS growth has been greater than that of Berkshire all through the period in question. “You’da thunk BRK woulda done better than a major bank with tons of mortgages,” The Brooklyn Investor adds. But it didn’t.

These figures provide support for Buffett’s investing style. While a stock that has lost 75 percent of its value is unacceptable for a conservative portfolio, it is not for Warren Buffett. Stock price movements do not concern him particularly. He believes that the underlying health of the business is more important than stock price movements on a daily or monthly basis. His opinion is that stock prices will match the value of the business over time, according to the The Brooklyn Investor, and therefore a temporary loss of capital due to stock market volatility is not concerning.

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Instead of buying back shares, Berkshire Hathaway plans to raise more capital. A filing submitted with the U.S. Securities and Exchange Commission on Monday shows that the company has decided to issue an undisclosed amount of senior unsecured debt beginning February 1. As no reason was given for the issuance, speculation regarding Buffett’s plans are rampant.

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