Warren Buffett openly stated that he may buy a position in Australian banks — but he would probably demand a lower Commonwealth Bank of Australia (ASX:CBA) share price before he does that.
In June 2015, shortly after taking his first position in Insurance Australia Group Ltd (ASX: IAG), Buffett said:
“In looking at banks, I would say there is a good chance that five years from now, we will have bought one or more positions in Australian banks.”
At the top of Australian banking is the Commonwealth Bank, all $143 billion of it.
The Buffett-Munger Checklist
In an interview with the BBC during the Global Financial Crisis (2009), Buffett’s investing partner, Charlie Munger, revealed the duo’s secret investing sauce. It’s a surprisingly simple four-part checklist.
1. Buy businesses you are capable of understanding. Put another way, if you don’t understand it — don’t buy it. The Sydney Morning Herald quoted Buffett a few years ago as saying: “Banking is something I have looked at, I am comfortable with banks, we have some big positions in US banks.”
With around $28 billion of Berkshire Hathaway capital invested in Wells Fargo & Co, I think Buffett would be comfortable holding Commonwealth Bank shares — at the right price.
2. A durable competitive advantage is a must-have. A competitive advantage is something that makes a business capable of withstanding intense competition. Maybe it’s the brand, its products, dominance or regulatory position. It’s only durable if it can last.
Commonwealth Bank of Australia has the largest market share of mortgages, is ahead of its peers in terms of technology and is an efficient lender of capital.
3. Company management must have integrity and talent. This one is pretty straightforward. If you could pick two words to describe a great CEO those are probably what you would go with. Commbank CEO Ian Narev has done a good job since he joined the bank in 2007 as Head of Strategy.
4. No company is worth an infinite price. This makes sense. In some ways, it relates to the law of averages: If you do the same thing as everyone else — you will get an average result. Buffett waits for the valuation of shares to fall so hard that he cannot ignore it. Usually, these opportunities come at times when people are panicking like they were during the GFC when he bought share options in Goldman Sachs at a ridiculously cheap price. Buffett hoards cash and waits for these opportunities to present.
Based on valuation alone I do not think he would buy Commonwealth Bank of Australia shares today.
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