Whenever Warren Buffett and Berkshire Hathaway make a move in the markets, investors are keen to understand it and get some insights into the legendary investor’s thinking.
That’s exactly what happened yesterday when SEC filings revealed that Berkshire Hathaway had bought shares worth $US4.02 billion in JPMorgan Chase & Co, US$829 million worth of shares in Bank holding company PNC Financial Services, US$460 million worth of shares in an insurance company called Travelers as well as a US$2 billion investment into Oracle.
Berkshire Hathaway already owns significant amounts of shares in Banks such as Goldman Sachs, Wells Fargo, Bank of America, and U.S Bancorp.
Why is the Oracle of Omaha so bullish on banks?
Does this mean you should take a closer look at investing into our own Australian banks Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB)?
Why Buffett loves financial services
Whilst we can never know for sure, I think there are two main reasons why Warren Buffett loves investing in financial services companies.
Firstly, it is an industry that he understands very well. This deep understanding allows him to invest at times when Bank shares are not popular, like during the global financial crisis when he invested into Goldman Sachs and Bank of America.
Secondly, Buffett loves companies that are able to borrow for long periods of time at a cheap cost. Bank’s pay very little interest on customer deposits and can lend that money out at higher rates. Likewise, insurance companies charge premiums and can invest that money interest-free before they have to pay back some of it in claims.
Should you follow this strategy?
I wouldn’t load up on Bank shares just because Warren Buffett is doing it. I think that the profile of Australian banks is slightly different to US banks because Australia has more retail banks which have portfolios that are largely made up of housing loans.
The level of regulation, oversight and general scrutiny over Australian banks is quite high at the moment, resulting in our banks curtailing some of their ambitious growth plans.
I also don’t think that Buffet’s strategies are necessarily suitable for retail investors given that he is already a billionaire and might have a different risk tolerance, financial goals and strategy compared to retail investors looking to build wealth or net income.