Berkshire Hathaway Inc. (BRK.A), Wells Fargo & Co (WFC) & More: Warren Buffett Knows Nothing!

Page 1 of 2

The “StressTest” column appears every Thursday on Check back weekly, and follow @TMFStressTest on Twitter.

Warren Buffett Coca-Cola Company (KO)A careful observer might wonder if the widespread adoration for Warren Buffett is little more than lip service. Or, at the very least, some Buffett admirers are suffering from a bout of cognitive dissonance.

In the wake of the Great Recession, a great many investors — not to mention the media — have yet to get over the crisis-induced hatred of banks. A quick search of headlines over the past year is revealing:

“Bank of America too big, complex to be manageable”
“Wilbur Ross: Banks ‘Too Complex to Manage'”
“Bank Of America Has Failed Shareholders”
“19,654 Reasons Big Banks Are Too Complex”

To read much of it, there’s no hope for the banks’ own executives — let alone outside investors — to understand what’s going on in those banks. Investing in a situation like that would be financial suicide.

But the much-revered Buffett seems to be on a completely different page.

At Berkshire Hathaway Inc. (NYSE:BRK.A) Buffett has a portfolio that’s top-heavy with financial-industry exposure, and he’s particularly overweight in large-cap banks. Wells Fargo & Co (NYSE:WFC) is the conglomerate’s single largest common-stock holding at close to $20 billion. The company also holds a $2 billion-plus position in U.S. Bancorp (NYSE:USB). Combined positions in The Bank of New York Mellon Corporation (NYSE:BK) Mellon and M&T Bank Corporation (NYSE:MTB) come out to more than $1 billion. Berkshire will also have a large common-stock position in Goldman Sachs Group, Inc. (NYSE:GS) when the companies settle up Berkshire Hathaway Inc. (NYSE:BRK.A)’s warrants later this year. Based on today’s share price for Goldman Sachs Group, Inc. (NYSE:GS), that stake would likely be over $2 billion. Finally, the company has a $5 billion preferred-stock investment in Bank of America Corp (NYSE:BAC) .

One of two things is clear here. One possibility is that Buffett has no idea what he’s doing and is throwing darts at the wall. “Understand what you’re investing in” be damned! He’s buying bank stocks because he’s buying bank stocks. He’s Warren Buffett after all, why would he need to actually understand the businesses?

The other possibility is that Warren Buffett understands something that the media and many other investors don’t. Perhaps that the basic banking business is a really darn attractive one — borrow at one rate, lend at a higher one, put modest leverage on your balance sheet, rinse, repeat, collect your handsome profits. Or maybe he understands the big banks aren’t quite as complex as many want to paint them. Sure, Bank of America Corp (NYSE:BAC) has trading operations, and it buys and writes derivatives. But most of the bank’s profits come from its consumer and business banking — that is, traditional “vanilla” banking.

Page 1 of 2