Buffett loves banks

Buffett is deeply familiar with banking and financial services. He believes the business is relatively straightforward and can be extremely lucrative if managed well.

“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,” he told Berkshire Hathaway investors in 2003.

What about the 2008 Global Financial Crisis? Buffett went on a shopping spree during that time, picking up stakes in JP Morgan (JPM) and Goldman Sachs (GS).

For several years, major banks have been the biggest holdings in the Berkshire portfolio. In 2009, he even said Wells Fargo (WFC) was his highest-conviction investment.

“If I had to put all my net worth in one stock, that would’ve been the stock,” he told Berkshire shareholders.

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Catching Buffett on the rebound

This year, Buffett has completely exited all these investments. Only a few banks remain in the portfolio.

That doesn’t mean the love affair with financial services is over.

In fact, Buffett added a new bank to his collection this year: Citigroup. During the first quarter of 2022, he added 55 million shares of Citigroup to the Berkshire portfolio.

The stake is now worth $2.5 billion, making it the 16th largest holding in the basket.

The bet seems to be predicated on a turnaround story.

Citigroup’s transformation

Citigroup has lagged behind its peers. Over the past five years, the stock is down over 28%.

Compare that to Bank of America’s 37% return over the same period. Even the SPDR S&P Bank ETF (KBE) is up 1.9%.

The company is now attempting a turnaround to catch up. Last year, Citigroup’s board appointed Jane Fraser as the new CEO — making her the first female leader of a major U.S. bank.

Fraser's strategy involves focusing on the more profitable segments of the business. Citigroup is selling or shutting down operations in Mexico, Australia, Philippines, South Korea and elsewhere.

Citi stock hasn’t fully reflected this new strategy.

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An undervalued opportunity?

Citigroup stock currently trades at a price-to-earnings ratio of 5.6. Its price-to-book ratio is 0.52. That’s significantly lower than the industry average of 9.45 and 1.12 respectively.

Put simply, the stock is cheap.

If the new management team can streamline operations and boost profitability, the bank’s valuation could catch up with peers.

Meanwhile, a rising interest rate environment should provide another tailwind.

Fine art as an investment

Stocks can be volatile, cryptos make big swings to either side, and even gold is not immune to the market’s ups and downs.

That’s why if you are looking for the ultimate hedge, it could be worthwhile to check out a real, but overlooked asset: fine art.

Contemporary artwork has outperformed the S&P 500 by a commanding 174% over the past 25 years, according to the Citi Global Art Market chart.

And it’s becoming a popular way to diversify because it’s a real physical asset with little correlation to the stock market.

On a scale of -1 to +1, with 0 representing no link at all, Citi found the correlation between contemporary art and the S&P 500 was just 0.12 during the past 25 years.

Earlier this year, Bank of America investment chief Michael Harnett singled out artwork as a sharp way to outperform over the next decade — due largely to the asset’s track record as an inflation hedge.

Investing in art by the likes of Banksy and Andy Warhol used to be an option only for the ultrarich. But with a new investing platform, you can invest in iconic artworks just like Jeff Bezos and Bill Gates do.

About the Author

Vishesh Raisinghani

Vishesh Raisinghani


Vishesh Raisinghani is a freelance contributor at Money Wise.

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