Monday, October 10, 2011

Chatter—Mindless Chatter

 There was “chatter” in the markets on Friday that Wells Fargo—the large US bank of which Berkshire Hathaway is the largest shareholder—was going to make a bid for Morgan Stanley, the currently beleaguered US investment that has been the subject of all kinds of rumors related to its financial health, so much so that last Thursday U.S. Treasury Secretary Geithner took it upon himself to declare there to be “absolutely” no chance of another Lehman Brothers-type collapse when asked at a Congressional hearing about Morgan Stanley.
 How the chatter on Friday got started, we have no idea, nor did we bother to find out.  After all, desperate investors start takeover rumors for the same reason desperate short-sellers start going-out-of-business rumors: to help their positions in a stock, however fleetingly.
 The funny (or frustrating, depending on your point of view) side-effect of such “chatter” is that companies routinely call on authorities to investigate negative, stock-dropping, going-out-of-business-type rumors—Exhibit A being, of course, Lehman Brothers executives, who excoriated everybody but themselves prior to the collapse—but never call on the authorities to investigate positive, stock-boosting takeover rumors.
 Along the latter lines, Exhibit A would be the investment bank formerly known as Bear Stearns.  Prior to its 11th-hour rescue in early 2008 at the hands of the Feds and JP Morgan’s Jamie Dimon, Bear was the subject of too-many-to-count takeover rumors, starting at multiples of $100 per share in 2007 and stair-stepping down to a $30 per share rumor that went around the Friday before the Sunday of JP Morgan’s actual bid, which, as it turned out, was $2 a share (later upped to $10).
  In any event, whether it was deliberate or delusional or merely daydreaming, somebody—we know not who, nor do we care—got the idea Friday morning that Wells Fargo was going to buy Morgan Stanley, and the rumor went around Wall Street even though it shouldn’t have, because anybody who knows the least bit about its largest shareholder, Warren Buffett, and his investment process (see here), would know that the idea makes no sense at all.
 For one thing, there’s the “competitive moat” Buffett demands of his acquisition candidates, of which Morgan Stanley hasn’t exactly the widest, as the assets tend to ride up and down the elevator each day.
 Then there’s Buffett’s eternal “make or buy” question when he evaluates a business: “How much money would I have to spend to replicate the business?”  And it would be reasonable to think that Warren Buffett might expect that he and Wells Fargo—with assets in excess of $1 trillion—could, over time, replicate Morgan Stanley on an outlay of something far less than its current market capitalization of $27 billion. 
 So count us skeptical...and always amused at what new “chatter” awaits the markets, from whatever anxious shareholders are out there.

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011)    Available now at

© 2011 NotMakingThisUp, LLC
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.

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Anonymous said...

It seems that this Buffett purchase of IBM is his largest equity purchase ever. I've re read his past letters and the way he described his KO purchase is very similar to his description of why he bought IBM. I wasn't in the business when he bought KO. Hopefully I would have been smart enought to buy a boat load and follow him. This time however i am in the business and have $ and did load the boat. Wondering what your viewpoint was on this purchase as you have watched every step he has made over the years. Thanks.

Jeff Matthews said...


Long run, Buffett is saying IBM is as much a part of the corporate world as Coke was of the consumer world when he bought Coke, and therefore hard to dislodge. Hard to refute that logic.

Near term, keep in mind IBM sells to every government in the world, including those that are reducing spending. Also, remember that Buffett bought IBM at a lower price than the most recent highs, prompted by news that he had purchased the stock. So you're paying a higher price than he did.

Sorry, I missed this question earlier.