While they may be known more for investing in insurance companies and firms that make and sell simple consumer goods, Warren Buffett and Berkshire Hathaway are also quite fond of bank stocks these days. In fact, if combined into one company, Berkshire’s bank investments would represent a $50 billion-market-cap bank — the eighth-largest in the US. And in a recent piece for CNBC, Tim Mullaney says that Buffett’s big bank position shows a good deal about his investment philosophy.
“By looking at the link between two of Warren Buffett’s classic investing rules and financial stocks, it’s easy to see how banks have become a cornerstone of Berkshire Hathaway’s holdings,” writes Mullaney. “One is to bet on industries that other companies need in order to do business and make the economy run, and the other is to be greedy when other people are scared.”
Mullaney also says some of Berkshire’s biggest bank holdings display a Buffett-like conservativism. “At a Barclays conference in September, Wells Fargo and U.S. Bancorp presented virtually identical slides touting their rank as the first and second best-performing major U.S. banks in return on equity, return on assets and the so-called “efficiency ratio,” which analysts use to measure how effectively banks manage costs. By all three measures, U.S. Bancorp, the nation’s fifth-largest bank, is tops, and Wells Fargo is No. 2,” writes Mullaney. “Both banks mostly eschew the razzle-dazzle of trading and investment banking to focus on bread-and-butter businesses, like mortgage and car lending, as well as Main Street-oriented commercial loans. U.S. Bancorp has nearly doubled its consumer-loan market share since 2007, the year after Buffett began building what is now about a 4 percent stake, and grabbed almost 7 percent of the market for middle-market syndicated loans, up from nearly zero before the recession. Wells Fargo is the nation’s largest lender in mortgages, small-business lending and auto loans.”
Mullaney also says Buffett’s “greedy when others are fearful” approach is evident in “the sweet terms Buffett has extracted in snapping up stakes in financial companies at times of crisis, including American Express (way back in the 1960s), Bank of America and Goldman Sachs, which were the signature post-crash Buffett bailout bets.”