Warren Buffett is selling banks. Should I?
According to Warren Buffett, the outlook for banks is uncertain. And the Berkshire Hathaway CEO has been putting his money where his mouth is and disposing of banking investments.
I own shares in two of the largest banks in the world, both of which are (according to the most recent filing) part of the Berkshire portfolio. So should I also sell my bank shares?
At the Berkshire Hathaway shareholder meeting, Buffett outlined three major risks for bank shareholders. The largest is the threat of regulation.
There are two distinct issues here. The first is that the future of the industry will be determined in large part by people who aren’t bank experts.
The second is the people involved in regulation might have their own interests to consider. So popular policies might prevail over policies that are right for the banks.
Buffett also noted it’s now much easier for anxious customers to pull their deposits than it was a 80 or so years go. The risk of a bank run is therefore potentially higher than it was before.
I think both of these are genuine risks with owning bank shares, whether in the US or the UK. But neither convinces me that I ought to sell my investments.
The first risk is to do with regulation. While it’s true banks are vulnerable to regulation that might not help their businesses, this is also true of other industries.
Furthermore, two of Berkshire’s biggest subsidiaries operate in regulated industries. Both utilities and railroads are regulated and it’s possible for regulation there to have ill effects.
Despite this, both manage to earn decent returns. And the utilities business, in particular, is one that seems to have strong growth prospects.
There’s definitely room for uncertainty about what banking might look like in future. But these examples demonstrate to me the possibility of good returns in a regulated industry.
The other risk Buffett identified was deposits leaving. It’s definitely true that customers don’t have to stand in line to get their money out of a bank – they can do it almost instantly.
In the case of the biggest banks, though, I think the risk of this is limited. During the recent panic, it looks to me like the largest banks have seen deposit inflows, rather than outflows.
To me, this indicates that confidence in the biggest banks – those considered too big to fail – remains robust. And the recent crisis seems to have caused the strong to get stronger.
JP Morgan’s acquisition of First Republic and HSBC’s purchase of SVB’s UK operations look like opportunistic moves to me. Both have managed to pick up assets at bargain prices.
Investing in bank shares
As an investor, I have to make my own decisions and be responsible for them. I wouldn’t buy a stock because someone else – even Warren Buffett – did and the same goes for selling.
Ultimately, I don’t see either the threat of tougher regulation or the potential for a panic as a decisive reason to sell bank stocks. So I plan to keep my investments for the foreseeable future.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Stephen Wright has positions in Berkshire Hathaway. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023