Many view Warren Buffett as the premiere investor to emulate. He grew Berkshire Hathaway Inc. (NYSE:BRK.A) from a textile company into one of the most valuable companies in the world: > $500 billion market capitalization in 2020.
Much of his success stems from buying stakes in financial companies; their business is after all to make money. In fact, financial businesses have made up a large portion of Berkshire’s investment portfolio for many years. So why did Buffett sell bank stocks?
In the second quarter of 2020, Berkshire Hathaway sold massive stakes in nine of its major financial investments, including Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), Visa (NYSE:V) and Mastercard (NYSE:MA).
The Oracle of Omaha clearly saw something most didn’t, so let’s run the numbers to understand why Buffett divested his interests in arguably his favorite industry.
Why Did Buffett Sell Bank Stocks?
Long story short, Buffett no longer sees long-term profitability in bank stocks. Many bank stocks failed during the Great Depression, and he likely fears the next five years will be rough for these bank stocks.
Buffett doesn’t believe in the financial industry’s ability to recover from the fallout of the economic downturn as others might hope. We’re in a much different technological and economic society than back when they struggled a century ago.
An estimated 22 percent of U.S. households were unbanked or underbanked leading into the pandemic. This means they weren’t serviced by traditional banking services, which opened a lane for apps like Square’s CashApp.
Indeed many crypto and blockchain projects focus on mobile wallets and payment options using cryptocurrencies. This creates a whole new world that traditional banks and payment processors have no stake in nor any competitive advantage.
Instead of gambling with a sector he’s unfamiliar with, Buffett instead sold off many of his bank holdings to focus more on Berkshire Hathaway’s energy and natural gas assets for more reliable revenue backed by a commodity he understands well.
That doesn’t mean he sold all of his bank holdings though.
Does Buffett Own Bank Stocks Now?
Berkshire Hathaway (BRK.B) still generates the bulk of its revenues from the insurance business, which is closely related to financial services.
Still, Buffett sold all or most of nine of its financial holdings, including:
· Wells Fargo (NYSE:WFC) 85,630,213 shares sold
· U.S. Bancorp (NYSE:USB) 497,786 shares sold
· Bank of New York Mellon (NYSE:BK) 7,407,604 shares sold
· JPMorgan Chase (NYSE:JPM) 35,506,006 shares sold
· Visa (NYSE:V) 575,000 shares sold
· Mastercard (NYSE:MA) 370,000 shares sold
· PNC Financial (NYSE:PNC) 3,847,398 shares sold
· M&T Bancorp (NYSE:MTB) 845,866 shares sold
· Goldman Sachs (NYSE:GS) 1,920,180 shares sold
At the same time, he also bought 20.9 million shares in Barrick Gold Corp (GOLD). When confidence in government collapses, gold is a refuge. This is an ominous sign for the future that Buffett, who traditionally shunned gold, embraced a gold miner.
Of course, Berkshire Hathaway notably kept one bank stock.
The firm’s nearly 12 percent stake in Bank of America remains intact – in fact, the company poured another $2 billion B of A stock while divesting itself of most of the rest of its financial stakes.
He’s also a major investor in American Express (AXP), which is committed to helping small businesses grow and has stricter standards in place for its charge cards. It’s possible he still sees value in the other side of the income gap.
Super wealthy and corporate clients tend to have an American Express Centurion card (aka the Black Card). This allows customers to schedule travel and other event purchases around traditional methods. That’s something the ultra-rich are likely to keep, even as the wealth gap widens.
If Buffett is selling his bank stocks, are they a good investment for you?
Are Bank Stocks A Good Investment?
Bank stocks suffered compared to technology stocks during the 2020 pandemic lockdowns. This is because they found themselves stuck in the middle of eviction/foreclosure moratoriums, business client bankruptcies, and more.
The overall effect was that stocks like Bank of America and JPMorgan Chase both ended the year at lower levels than those at which they began the year. Both recovered from crash lows, but they were still trading lower in December than what they did the first quarter of 2020.
Some banks, like Wells Fargo, are still facing expensive fines and litigation too.
Visa and Mastercard did return to pre-pandemic trading levels, but they both leveled off by year-end.
Each faces challenges next year, especially in foreign markets like the European Union. A commission there introduced the European Payments Initiative (EPI) to replace the continent’s dependance on American financial services.
Where the industry’s underperformance really shines is when compared to fintech companies PayPal and Square, which both increased exponentially to historic new high valuations. This was fueled by the move to curbside delivery, contactless payments, and ecommerce.
The pandemic accelerated growth for these newcomers while rendering useless much of the expensive infrastructure the traditional payment networks installed over the past decade. Chip cards are certainly still in use, but these processors are being bypassed and replaced by other middlemen at every corner.
At this point, it’s almost as safe to invest in Fintech companies as it is to invest in bank stocks.
Why Did Buffett Sell Bank Stocks: The Bottom Line
Warren Buffett is one of the savviest investors on the market. When the pandemic hit, he sold off his banking stocks because he saw how they could suffer from debt write-offs as consumers struggle in an ever more challenging economic environment.
Meanwhile, Fintech companies like Square and PayPal reached new historic high market capitalizations as technology usurps traditional banking offerings.
Buffett stuck to commodities like gold and natural gas, which he understands well. However, Fintech outperformed his investments in those areas which could be a sign that he missed the boat on companies that have successfully merged technology with finance.
The hanging question is what will happen to the entire financial industry as the global economy stabilizes over the next five years. Buffett is clearly betting against a positive outcome.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.