Be fearful when others are greedy, and greedy when others are fearful.
Warren Buffett
Warren Buffett is known as a man who lives up to what he says. So I think I could assume that the Oracle of Omaha might be weighing up a few opportunities created by the fallout from the collapse of Silicon Valley Bank.
Indeed, Buffett is said to have already held discussions with President Joe Biden about the unfolding banking crisis. Of course, we don’t know what these talks were about — merely advice, financial assistance, or a combination of both.
But I’d be surprised if this crisis doesn’t end with more bank stocks in the portfolio of Berkshire Hathaway, Buffett’s holding company.
What might he be buying? And what should I do, if anything?
Hunting ground
The financials sector has historically been a favourite hunting ground for Berkshire. Indeed, as of 31 December, just under 25% of the $321bn investment portfolio Buffett oversees is invested in this one sector.
The largest financial stock held by it is Bank of America. It has just over one billion shares of the company, valued at some $29bn, as of the fourth quarter. That makes the bank Berkshire’s second-largest holding.
Could Buffett be topping up this already massive position?
Well, it seems a candidate, with the shares down 17% year to date. But I also expect him to be looking at mid-sized regional banks. These have been hit hard as depositors have withdrawn their money in favour of larger banks they perceive as more stable.
I personally don’t think Berkshire will acquire a US bank in full, as it hasn’t historically wanted to exceed a 10% to 15% stake in any single one. Owning more than this opens up regulatory and reporting requirements that the company has little appetite to deal with.
Elephants and mosquitoes
Like many investors, I closely follow what the Oracle of Omaha is buying and selling. And for me, his annual letter to Berkshire shareholders remains a must-read document.
However, that doesn’t mean I simply replicate whatever he’s doing in the market. Why?
Well, for one, Berkshire was sitting on more than $100bn in cash and cash equivalents at the end of 2022. And as strange as it sounds, this massive cash pile can actually create problems when looking at which stocks to buy.
As Buffett himself once admitted: “The universe I can’t play in has become more attractive than the universe I can play in. I have to look for elephants…[and] it may be that the elephants are not as attractive as the mosquitoes.“
Looking for “elephants” basically means focusing on large-caps, including banks. But they might not be as attractive as smaller capitalised companies.
Of course, as a humble individual investor, I’m not confined to large-caps. I can pursue attractive opportunities wherever I see them.
And I’ve got my eye on Games Workshop and Volution Group at the moment. Both are far too small to ever cross the radar of Warren Buffett. But I’d rather invest in these mosquitoes than banks as things stand.
