Warren Buffett – Banking Stocks

| November 19, 2007 | 0 Comments

Warren Buffet is the greatest investor in the world.  He started with a few thousand dollars and is now worth billions.  It’s not often that I disagree with him, but occasionally I do.  This week is unique, because I’m going to disagree with him not once but twice.

Warren was recently in front of congress arguing for a continuation of the death tax.  Unfortunately, members of congress are listening to him.  I fundamentally have a problem with government taxing me on money I already paid taxes on – that is known as double taxation and it is wrong.
I can go on and on about this issue, but there is something more important I must address.

The death tax is not the only thing I disagree with Warren on.

Warren has recently started buying banking stocks.  Just in the last quarter, he increased his holdings of Bank of America (BAC) by 300,000 shares and US Bank (USB) by more than 11.3 million shares.  Let’s also not forget about Wells Fargo (WFC).  He added just under 38 million shares of Wells Fargo to his portfolio last quarter.  These are not inconsequential holdings for Warren.

Fellow superstar investor Eddie Lampert has jumped on the banking bandwagon as well.  Eddie’s most famous holding is Sears (SHLD), which everyone knows is a large retailer in the US.  What many people don’t realize is that he is also a major holder of Citigroup (C).

Eddie, in the last few months, increased his holdings from more than 24.8 million shares to just under 27.8 million shares.  Citigroup hovered between $45 and $50 per share during the time he was adding to his portfolio.  This represents an investment of more than $135 million dollars!

Both of these giants of investing have recently increased their holdings in bank stocks, and I can see why.  These are huge companies with great brands, and solid businesses.  The likelihood of bankruptcy is almost nonexistent, but the current outlook due to the subprime crisis, is horrible.  Every news item is bad, earnings are suffering, and the stocks are trading at levels not seen in years.  It seems all of these purchases occurred right in the middle of the mortgage market debacle.

To paraphrase Warren, “Be greedy when others are afraid; and afraid when others are greedy.”

Now here is the problem.  I believe these investment superstars are moving in too quickly.  All of the bad news is not out, other financial institutions are still announcing write downs, and management teams are being shown the door.  A perfect example is Citigroup, which Eddie bought between $45 and $50 per share.  Today it trades around $34.

I would suggest patience and wait for the bad news to fully shake out of the market.  If you are really aggressive, look to take up positions in middle to late December when all of the tax loss selling has taken its toll. However, if you move that early, be prepared for some further bad news, and look to add to positions when they fall.  For the more conservative investors, I would wait until year end announcements are made in late January and early February.  At that time, all of the bad debt will have been flushed from the books, and stocks should be staging a rebound.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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