The key though — if we’re buying into scenario No. 2 — is that Buffett “understands.” Berkshire has owned Wells Fargo & Co (NYSE:WFC) for more than 20 years. Ownership of M&T Bank Corporation (NYSE:MTB) goes back more than a decade. Heck, until 1980, when regulatory changes forced the sale, Berkshire Hathaway Inc. (NYSE:BRK.A) owned an entire bank outright (Illinois National Bank and Trust of Rockford). In other words, this isn’t an industry that Buffett stumbled on over the last couple of years, read a few Wall Street Journal articles, and decided that it was ripe for a few-billion-dollar investment. This is a business and industry that Buffett knows backward and forward.
You might think the message here is that you should ignore the media and the wailing and gnashing of teeth over big banks and go ahead and buy some bank stocks. But that’d miss the point. Sure, I think a lot of the fretting over the banks is off-base. But the route to realizing that shouldn’t be simply reading my opinion. Or, for that matter, noting that Buffett is betting heavily on the industry. Instead, that realization should come through a thorough understanding of the banking business, and how and why the banks are set to outperform in the years ahead.
How do you get to that point? If Buffett is any model, one route is to read everything you can. After making a multibillion-dollar investment in International Business Machines Corp. (NYSE:IBM) at Berkshire Hathaway Inc. (NYSE:BRK.A), Buffett said he’d been reading the company’s annual report for 50 years. That’s a lot of study for a single investment. (Hey, nobody said this was easy!)
So sure, perhaps Warren Buffett knows nothing and is making a big mistake by investing in banks. Or, maybe, just maybe, Buffett is loading up on banks because he knows what he knows, and thanks to that, he knows how to identify a big opportunity within that circle of competence.
The article Warren Buffett Knows Nothing! originally appeared on Fool.com.
Matt Koppenheffer owns shares of Berkshire Hathaway Inc. (NYSE:BRK.A), Goldman Sachs, and Bank of America Corp (NYSE:BAC). The Motley Fool recommends Bank of America, Berkshire Hathaway, Goldman Sachs Group, Inc. (NYSE:GS), and Wells Fargo. The Motley Fool owns shares of Bank of America, Berkshire Hathaway Inc. (NYSE:BRK.A), International Business Machines, and Wells Fargo & Co (NYSE:WFC).
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