Warren Buffett’s Berkshire Hathaway Pared Down Its Bank Holdings. That Looks Like a $10 Billion Mistake.
Warren Buffett of Berkshire Hathaway
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Berkshire Hathaway CEO Warren Buffett soured on many bank stocks last year. That decision cost Berkshire about $10 billion, given the strong rally in the sector in recent months, Barron’s estimates.
During 2020, Berkshire Hathaway (ticker: BRK.A and BRK.B) sold positions in JPMorgan Chase (JPM), Goldman Sachs Group (GS), PNC Financial Services Group (PNC), and M&T Bank (MTB), while sharply reducing a longstanding holding in Wells Fargo (WFC).
The sales of bank stocks were one of Buffett’s investment miscues during a year of mistakes and missed opportunities. Berkshire also sold about $6 billion of airline stocks near the sector’s low last April. The four major airline stocks formerly held by Berkshire have since roughly doubled.
Buffett oversees Berkshire’s $290 billion equity portfolio. Berkshire failed to capitalize on the market turmoil to make any major acquisitions, and the company was a net seller of more than $8 billion of stocks last year.
During 2020, Berkshire made sizable investments of $8 billion in Verizon Communications (VZ) and $5 billion in Chevron (CVX). And it bought about $2 billion in three different drug stocks. Only Chevron is showing a notable gain.
Berkshire still has a big holding of more than one billion shares of Bank of America (BAC) worth about $38 billion and smaller holdings in U.S. Bancorp (USB) and Bank of New York Mellon (BK). Berkshire owns a large and long-held stake of $21 billion in American Express (AXP).
Before the sales of bank stocks last year, Berkshire was heavily exposed to the sector, holding an interest in all the major U.S. banks, except for Citigroup and Morgan Stanley. Buffett may have felt that Berkshire was too exposed to the sector given the weak economy last year. He had no immediate comment.
The JPMorgan and Wells Fargo sales are notable because they were the largest positions sold.
Berkshire held about 60 million shares of JPMorgan, worth around $8 billion at the start of 2020, and 345 million shares of Wells Fargo, worth $18 billion.
The JPMorgan position is gone, having been sold largely in the second and third quarters when the stock averaged less than $100 a share. The shares are now around $150. One of Berkshire’s investment lieutenants, Todd Combs, is on the board of JPMorgan. Combs and Ted Weschler run an estimated total of about 10% of the Berkshire equity portfolio.
Berkshire steadily sold down its Wells Fargo stake starting in the second quarter, and held just 52 million shares at year-end 2020. The stock averaged about $26 a share during that period against a recent price of $39. Berkshire had held Wells Fargo for 30 years.
In February 2019, Buffett explained to CNBC why he liked banks and other financials. “They’re very good investments at sensible prices, based on my thinking. And they’re cheaper than other businesses that are also good businesses by some margin,” he said.
He was particularly enamored of JPMorgan then, telling CNBC that he had been “dumb” for not buying JPMorgan sooner, given his admiration for CEO Jamie Dimon and the franchise. And he suggested that, considering the bank’s financial performance—it topped rivals with a 17% return on tangible equity in 2018—the shares should trade for at least three times tangible book value, which would put them above $170. Buffett was on the mark then as the stock recently hit a record $161.
Unfortunately for Berkshire, it’s not benefiting from that move and those in other bank issues.
Write to Andrew Bary at [email protected]
