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Why Buffett Waited to Buy JPMorgan Despite Its Potential

It has become extremely apparent in recent years that Warren Buffett (Trades, Portfolio) feels more comfortable investing in the financial sector than any other industry.

Banks and financial stocks now make up the bulk of Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) portfolio. It doesn't look as if the trend is going to end anytime soon.


Indeed, Buffett has hinted in the past that if the Federal Reserve removes the limitations on companies that own 10% or more of a financial institution, he will increase Berkshire's ownership of his favorite banks even further.

Buffett and JPMorgan

One bank the Oracle of Omaha has liked for some time, but has only recently added to Berkshire's portfolio, is JPMorgan Chase & Co. (NYSE:JPM).


Since the third quarter of 2018, Buffett has taken Berkshire's ownership of this business from zero to nearly 60 million shares. Following these deals, Berkshire owns a total of $6.5 billion worth of stock in the financial services enterprise.

When asked about his JPMorgan position in an interview with CNBC in April, Buffett said:

"You can find a bank like JPMorgan that earns maybe 15%, maybe 17%, even, on net tangible equity. A business that earns 15% or 16% or 17% on net tangible equity, that's incredible in a world of 3% bonds. I mean, just imagine that you had a deposit account with JPMorgan that they made a mistake and they gave you 15% on it. And they couldn't redeem it. What would you sell that account for? You wouldn't sell it for 100 cents on the dollar. You wouldn't sell it for 200 cents on the dollar. You wouldn't even sell it for 300 cents on the dollar. You have an FDIC-guaranteed instrument that would now be at 300 cents on the dollar. If it was 15% on equity, you'd be earning 5% on it, which is way better than treasuries."

This statement seems to suggest he believes the bank is worth multiples of its current price.

Personal acquisition

While Buffett has only recently added JPMorgan to the Berkshire portfolio, he has had this stock in his personal portfolio for many years.

As he doesn't reveal his personal trading data, we don't know when Buffett added JPMorgan. According to his comments in interviews and at the Berkshire Hathaway annual meeting, however, we know he has owned the stock since at least 2012.

Responding to a shareholder who asked why Berkshire owned so much Wells Fargo (NYSE:WFC) but no JPMorgan, even though Buffett owned it for his personal account, he replied, "The truth is, I like Wells Fargo better than I like JPMorgan."

The CEO of Berkshire went on to explain he usually buys his best ideas for the conglomerate's portfolio, which makes it difficult to include them in his personal portfolio:

"And that's one of the problems I have, is that I can't be buying what Berkshire is buying, and I've got some money around, and therefore, I go into my second choices, or into tiny little companies like I did with Korean companies and that sort of thing."

Following these comments, and some back and forth between Charlie Munger (Trades, Portfolio), who generally supported the idea Buffett should buy the best ideas for Berkshire's portfolio, the guru noted he thinks Wells Fargo is simpler and easier to understand. Therefore, it was always going to be the preferred investment.


So there we have it; that's why Buffett has been buying Wells Fargo while holding JPMorgan personally. He likes to put his best ideas in the Berkshire portfolio, and since Wells Fargo is easier to understand, he concentrated his firepower on this one position rather than spreading it across the rest of the industry.

Disclosure: The author owns shares of Berkshire Hathaway and Wells Fargo.

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This article first appeared on GuruFocus.