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No. of Recommendations: 14
Warren Buffett, the billionaire investor who oversees stakes in some of the largest U.S. banks, said the nation’s lenders have rebuilt capital to the point where they no longer pose a threat to the economy.

“The banks will not get this country in trouble, I guarantee it,” Buffett, chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc. (BRK/A), said in a phone interview last week. “The capital ratios are huge, the excesses on the asset side have been largely cleared out.”


http://www.bloomberg.com/news/2013-01-10/buffett-says-banks-...
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http://www.forbes.com/sites/abrambrown/2013/01/10/how-secure...

How Secure Is Warren Buffett's $24 Billion Bet On America's Largest Banks?

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[…]Even with an effort to increase Wall Street regulation in recent years, critics say it has not been enough. That, four years after government bailouts, banks still pose a considerable risk to America’s well-being and stability. 2012 did little to assuage those critics. It was a year in which Sandy Weil, the ex-Citigroup CEO who created today’s financial supermarkets, suggested Citi should break up, and JPMorgan Chase booked a $6.2 billion loss from a risky derivatives trade.

Moreover, Buffett’s words are starkly in contrast with what Frank Partnoy and Jessie Eisinger wrote in a recent Atlantic cover story. The pair posited a position in total opposition to Buffett: U.S. banks are too opaque, too little understood to warrant an average investor’s dollars.


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[…]Mainly, Partnoy and Eisinger base their stinging criticism on the fact that most banks do much more than lend money. Institutions book billions in profits from trading, while sometimes losing equally great sums of money, too.

To support their thesis, Partnoy and Eisinger dissect the financial statements of Wells Fargo—a bank considered a safer investment than peers because of its large mortgage business. It once again pits their ideas directly against Buffett. Wells Fargo is his favorite bank stock and Berkshire’s largest bank position. Partnoy and Eisinger, after likening reading a Wells Fargo 10-K to Dante’s travel through the underworld, conclude: “The sheer volume of ‘trading’ at Wells Fargo suggests that the bank is not what it seems.” They point to Wells Fargo’s $377 million loss through trading in collateralized debt obligations, a seven-digit sum that did indeed go mostly unnoticed. “$377 million here and $377 million there,” they write, “and pretty soon you’re talking about serious money.”
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No. of Recommendations: 8
Back in 2004 I was invested in a subprime lender. I had made a pretty good profit when all of a sudden there was bad news and it dropped about 35% in a day. I spent the whole night trying to read up and figure out what was going on (results far different from expectations and far different from what was deemed to be even possible by the bulls).

The next morning I bit the bullet and sold out. I admitted to myself that I'd been falsely confident about what I could understand about this total opaque (to the point of borderline deceitful) operation.

An august poster from the Fool boards told me "it's okay for you, since you don't understand it, to sell out. But for those of us that are smart and understand this company, this is a great opportunity."

The stock limped sideways for a few months and then went into a continued downward spiral, ending up as a zero.

Moral: banks might seem to have steady earnings like KO or JNJ, but it's a con. Banks are built out of nitroglycerin and rigged to explode. Look at any period of history other than "the Great Moderation".
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The next morning I bit the bullet and sold out. I admitted to myself that I'd been falsely confident about what I could understand about this total opaque (to the point of borderline deceitful) operation.

J.P. Morgan Chase had a two billion, I mean four billion, ooops I mean eight billion dollar loss on a trade the CEO said he didn't know about. If the CEO doesn't know...
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Banks are built out of nitroglycerin and rigged to explode. Look at any period of history other than "the Great Moderation".

You make a good point.

Even if they have survived the test of time...

http://en.wikipedia.org/wiki/Monte_dei_Paschi_di_Siena

they can cause portfolio explosions.

http://www.bloomberg.com/quote/BMPS:IM/chart

Coke and Band Aids often do better. Or ming vases if you have the time to wait.

jz
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Or ming vases if you have the time to wait.

Jack,

I'm not sure what you mean. You can still buy them at Sotheby's for loads of cash of course.

Harry
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Harry:


I'm not sure what you mean. You can still buy them at Sotheby's for loads of cash of course.


Just that investment results require time horizons that vary widely. We have vases that didn't appreciate in value for years and in the last 20 years have massively outperformed JNJ, KO, WFC BRK and lots of other shares. (We did sell two to buy a summer cottage in a depressed market two years ago ..and would probably have been better off renting.)

Jack
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investment results require time horizons that vary widely

Jack,

the history of fine and decorative art objects is subject to the accidents of changing tastes and other developments which usually occur within (relatively) short spaces of time. Thus fine 18th century French furniture dropped in price in London when French aristocrats that had fled from the revolution had to unload their valuables to maintain some sort of a lifestyle.

Another example that comes to mind is Victorian silver and furniture in the second half of the last century. Accepted standards of taste before thet held Victorians to be vulgarians and the correct tea and coffee services in correct households were strictly Georgian What brought about change is something I cannot touch here but it was all accomplished in a couple of decades.

I used to get catalogs of silver sales from Sotheby's and one day I received notice of a valuable object with the price at which it was first sold by its silversmith maker. The catalog also included the estimate at which it was thought to realize at the sale. Intrigued by thee data I calculated the CAGR over a couple of centuries and found it to be around two percent. As an investment it ws no better than consols, the English government bonds which have no maturity.

Go figure.

Your summer cottage would probably have been more attractive with a few Ming pieces here and there,

Harry
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No. of Recommendations: 3
An august poster from the Fool boards told me "it's okay for you, since you don't understand it, to sell out. But for those of us that are smart and understand this company, this is a great opportunity."

The stock limped sideways for a few months and then went into a continued downward spiral, ending up as a zero.

Moral: banks might seem to have steady earnings like KO or JNJ, but it's a con. Banks are built out of nitroglycerin and rigged to explode. Look at any period of history other than "the Great Moderation".



Buffett understands banking.

Buffett has taking a big swing at banking.

Buffett also bought two Irish banks in 2008 which basically went to zero. That should tell you something about investing in the banking industry.

I heard a great quote the other day: Intelligence is knowing the stove is hot; wisdom is what you have on your hands after you touch it. That's how investing in banks is for me (I also bought the Irish banks.)
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