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Collection: Warren Buffett - #286 'Bank Stocks'


Video Link: https://youtu.be/s5hpXeg5GYU


In this episode, Warren Buffett and Charlie Munger were asked what are the criteria for investing in banks? And have their general view toward investing in banks changed over time?


In this episode, you’ll learn:

  • What should you avoid in bank stocks?

  • Why banks are good business?

To check out all Collection: Warren Buffett <click here>

 

[Transcript]

(Source: https://buffett.cnbc.com/2003-berkshire-hathaway-annual-meeting/)

~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.

AUDIENCE MEMBER 00:00

Yes, hi. Sam Kidston. I’m a shareholder from Cambridge, Massachusetts. I have a couple of quick questions for you guys.


First of all, other than your general criteria for investing in any company, what are your criteria for investing in banks? And has your general view toward investing in banks changed over time?


WARREN BUFFETT 00:21

The question about banking, you know, banking — if you can just stay away from following the fads, and really making a lot of bad loans, banking has been a remarkably good business in this country.


Certainly, ever since World War II, it’s — the returns on equity from — for banks that have stayed out of trouble has really been terrific.


And there are many — there are certain banks, I should say — in this country that are quite large that are earning, you know, maybe 20 percent on tangible equity.


And when you think you’re dealing in a commodity like money, that’s fairly surprising to me.


So, I would say that I guess I’ve been surprised by the degree to which margins in banking have not been competed away in something as fundamental as money.


How about you, Charlie?


CHARLIE MUNGER 01:23

Well, what you’re saying, in fair implication, is that we sort of screwed up the predictions, because banking was a way better business than we figured out in advance.


We actually made quite a few billions of dollars, really, out of banking, and more in American Express. But basically that was while we were misappraising it.


We did not figure it was going to be as good as it actually turned out to be. And my only prediction is that we’ll continue to make failures like that. (Laughter)


WARREN BUFFETT 02:03

It’s fairly extraordinary, in a world of — particularly a world of low interest rates, that you’d find financial institutions basically doing pretty much the same thing, you know, where A competes with B, and B competes with C, without great competitive advantage, and having them all earn really high returns on tangible capital.


Now, part of it is that they push — they have pushed the loan-to-capital ratios higher than 30 or 40 years ago, but that — nevertheless they earn high rates of returns. They earn much higher rates of returns on assets alone, and then they have greater leverage of assets-to-capital so that produces returns on capital that really are pretty extraordinary.


And, you know, banks — certain banks — get into trouble because they make big mistakes in lending, but it’s not required of you, in that business, to get into trouble. I mean you can — if you keep your head about you, it can be a pretty good business.

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