130 THE WARREN BUFFETT WAY
matter how intelligently run.” Neither of those two could be ruled out
entirely, of course, but Buffett concluded, based on best evidence, that
the probability of either one was low.
The third risk, and the one getting the most attention from the
market at the time, was that real estate values in the West would tumble
because of overbuilding and “deliver huge losses to banks that have f i-
nanced the expansion.”^8 How serious would that be?
Buffett reasoned that a meaningful drop in real estate values should
not cause major problems for a well-managed bank like Wells Fargo.
“Consider some mathematics,” he explained. Buffett knew that Wells
Fargo earned $1 billion pretax annually after expensing an average
$300 million for loan losses. He f igured if 10 percent of the bank’s $48
billion in loans—not just commercial real estate loans but all the bank’s
loans—were problem loans in 1991 and produced losses, including in-
terest, averaging 30 percent of the principal value of the loan, Wells
Fargo would still break even.
In Buffett’s judgment, the possibility of this occurring was low. But
even if Wells Fargo earned no money for a year, but merely broke even,
Buffett would not f linch. “A year like that—which we consider only a
low-level possibility, not a likelihood—would not distress us.”^9
The attraction of Wells Fargo intensif ied when Buffett was able to
purchase shares at a 50 percent discount to their value. His bet paid off.
By the end of 1993, Wells Fargo’s share price reached $137 per share,
nearly triple what Buffett originally paid.
BUY AT ATTRACTIVE PRICES
Focusing on businesses that are understandable, with enduring eco-
nomics, run by shareholder-oriented managers—all those characteris-
tics are important, Buffett says, but by themselves will not guarantee
investment success. For that, he f irst has to buy at sensible prices, and
then the company has to perform to his business expectations. The sec-
ond is not always easy to control, but the f irst is: If the price isn’t satis-
factory, he passes.
Buffett’s basic goal is to identify businesses that earn above-average
returns, and then to purchase these businesses at prices below their