Fear The Write-Off

In 2000, the bubble was burst. Chip makers, along with the entire tech world, were suffering from a dramatic down turn. Micron Technology was surprised and suffering from the down turn; inventory was up and useless.

Like many other companies, the write-offs were massive: $261 million in the second quarter. To boot, this write down was considered a non-reoccurring event by investors. How wrong they were. The next six quarters held more write-offs in store.

Fast forward to this week. Citi, Merrill Lynch, UBS, WaMu, and Deutsche Bank all take huge write-offs and profit dips from holding sub-prime portfolios. Alarms should be going off in the Long Term Investor's skull. These write-offs warn of many potential issues.

We fear that companies like WaMu, Countrywide, and other highly-leveraged banks will continue to write-off their portfolio which is a sign of management's admition of acting with the short-term in mind. Banks this highly leveraged look great when on the way up but the drops are just as amplified and dramatic. Too dramatic unless you have nerves of steel. Most people don't.

Other concerns are banks that "fill the cookie jar". The Wall Street Journal pointed out that when the portfolios catch a rebound in the future, they will artificially inflate profits. With these portfolios taking understated positions on balance sheets, a bounce will look massive. When this happens, don't fall for the sudden and freakish improvement - their is virtue in slow, steady, and conservative growth in banks.

The greatest lesson from this cycle is what is learned about management. Compare the actions of the firms listed above (CFC being the most dramatic/news worthy) and the safe, well managed banks owned by Berkshire (STI, UBS, WFC, BAC). Wells Fargo, and their genius contrarian management, have just begun building up a mortgage branch with the cheap, fallen ruble of the over-aggressive, short sighted firms.

For income investors, these dividends can act as income for life if you don't fear concentration.

October 5, 2007
STI - 3.78%
UBS - 4.78%
WFC - 3.3%,
BAC - 4.89%
Average - 4.1875%