Warren Buffett is 'very cautious' about investing in bank stocks. Should you be?

Warren Buffett didn't miss a beat at Berkshire Hathaway's annual general meeting, held in Omaha Nebraska on Saturday.

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Warren Buffett hosted Berkshire Hathaway’s annual general meeting alongside Charlie Munger over the weekend
  • The Oracle of Omaha is very cautious about investing in bank stocks
  • ASX 200 banks have a large exposure to residential and commercial real estate loans

Warren Buffett and Berkshire Hathaway co-founder Charlie Munger were in the spotlight on Saturday.

The two legendary investors, both in their 90s, didn't miss a beat at Berkshire Hathaway's annual general meeting. The event was attended by a massive crowd of some 40,000 people at a convention centre in Omaha, in the US state of Nebraska.

Among the highlights on the day, Warren Buffet – well-known as a value investor – sounded off on the ongoing US banking crisis.

What's going on with Warren Buffett and bank stocks?

The Oracle of Omaha began divesting Berkshire's sizeable holding of bank stocks in 2020.

And with the banking crisis that erupted in the US and Europe in March, that move looks to have been prescient.

The collapse of First Republic – the biggest bank failure since the 2008 GFC – followed on the heels of numerous other regional bank implosions in the US, including Silicon Valley Bank and Signature Bank. Financial contagion from the collapses led to a similar liquidity crunch at Credit Suisse, which was then scooped up by UBS.

Today Warren Buffet really only expresses confidence about one bank stock. Namely, Bank of America Corp (NYSE: BAC), in which he holds a 13% stake.

"I like Bank of America and I like the management," he said, referring to long-time Bank of America CEO Brian Moynihan.

Drilling into First Republic, he said the bank's long-term, low fixed-rate mortgages were "a crazy proposition".

"It was doing it in plain sight and the world ignored it 'til it blew up," he said (quoted by Bloomberg). "The incentives in bank regulation are so messed up and so many people have an interest in having them messed up… So we are very cautious in a situation like that about ownership."

And Warren Buffett was adamant that the banks' bosses be held to account for their mistakes.

"The situation in banking is very similar to what it's always been in banking – the fear is contagious, always," he said. Adding that penalties should "hit the people that caused the problems".

The Berkshire CEO said shareholders of bad banks should lose their investments. "We don't know where shareholders of banks are going," he said. "Banking can have all kinds of new inventions, but it needs to have old value."

Should we be cautious of ASX 200 bank stocks?

To date, the banking crisis has largely been contained to the US and Europe.

But should we worry about the health of S&P/ASX 200 Index (ASX: XJO) bank stocks, which count as the best capitalised in the world?

Perhaps.

Rob Shears, investment manager at Valor Private Wealth, points to the concerns Warren Buffett and Charlie Munger raised on bank loans to the real estate sector (courtesy of The Australian Financial Review).

"The banks extend and pretend. But we are starting to see the consequences of people who could borrow at 2.5%, see that it doesn't work at higher rates and hand [the property] back," Warren Buffett said. "Berkshire has never been active in commercial real estate."

Sounding a warning note for potential problems ahead for ASX 200 bank stocks, Shears said:

The things that Warren and Charlie are warning about are things that Aussie investors have a lot in their industry super funds.

So banks are problematic in Australia, because of the residential property bubble. Commercial real estate, it's still part of the Aussie banks and if you go around the city in Sydney and Melbourne, the offices are still empty.

Those problems may loom on the horizon.

But the big four bank stocks are all well into the green in late morning trade this Monday.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Bank of America and Berkshire Hathaway. The Motley Fool Australia has recommended Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

A happy elderly man wearing a red cape smiles as he jumps up like a hero from a massage table.
How to invest

How to keep investing simple (and fun!) with this timeless strategy

There’s a smarter, simpler way to invest that’s caught the attention of beginners and pros alike.

Read more »

Man puts arm around woman and kisses her cheek outside their new home
How to invest

How to build a $100,000 ASX share portfolio from scratch

You may be surprised how quickly you could reach this goal.

Read more »

asx share price fall represented by investor with head in hands
How to invest

Should you sell you ASX shares if you think a stock market crash is coming?

Can we ever predict a market crash?

Read more »

A happy young couple lie on a wooden deck using a skateboard for a pillow.
How to invest

How to build wealth with ASX shares without taking big risks

Many investors believe they need to chase high-risk, speculative ASX shares to grow their wealth quickly. But in reality, most…

Read more »

Happy man holding Australian dollar notes, representing dividends.
How to invest

How $500 a month in ASX shares could become $1 million

It might not be as hard as you think to become a millionaire through the share market.

Read more »

Man pointing an upward line on a bar graph symbolising a rising share price.
How to invest

How to invest when the ASX hits a record high

Worried about buying at today's prices? Here's why you shouldn't be concerned.

Read more »

A man wearing glasses sits back in his desk chair with his hands behind his head staring smiling at his computer screens as the ASX share prices keep rising
How to invest

Lessons from a self-made ASX millionaire

Here's how he did it.

Read more »

A couple cheers as they sit on their lounge looking at their laptop and reading about the rising Redbubble share price
How to invest

$20,000 in savings? Here's how to target $1,000 of passive income each month

This could be the easiest way to build a meaningful passive income from the share market.

Read more »