1 Chart That Illustrates Warren Buffett's Investing Philosophy Better Than Thousands of Words

Want to know what Warren Buffett's investment philosophy teaches? This chart pretty well sums it up.

May 4, 2014 at 5:30PM


There's an endless amount of commentary on Warren Buffett's approach to investing, but the preceding chart captures his approach better than perhaps all of it -- with the exception, of course, of Buffett's own annual letters to the shareholders of Berkshire Hathaway.

As avid Buffett followers know, the Oracle of Omaha has a particular place in his heart (and Berkshire's equity portfolio) for bank stocks. While Wells Fargo (NYSE:WFC) is Berkshire's largest and perhaps best known holding -- the one exception to this being Coca-Cola -- Buffett has also stuffed the conglomerate's coffers full of stock in American Express (NYSE:AXP), US Bancorp, and M&T Bank. And most recently, he staked a $5 billion claim in Bank of America (NYSE:BAC), the nation's second largest bank by assets.

Leaving the final position to the side for a moment, what do these companies have in common? The answer is: They are, bar none, the best run banks in the country. Among the nation's largest lenders, American Express, US Bancorp, and Wells Fargo are the top three in terms of profitability, returning more on their assets over the last two decades than any of their competitors.

Meanwhile, M&T Bank is the best-performing bank stock over the past three decades. Since 1983, its dividend-adjusted compound annual growth rate (or, rather, that of its stock) comes in at 15.8%, outpacing even US Bancorp and Wells Fargo, which sport CAGRs of 12.9% and 12.5%, respectively, over the same time period. It's for these reasons that I've deemed M&T Bank the gold standard among bank stocks.

With this in mind, one might find it peculiar that Buffett decided to make such a sizable investment in Bank of America -- which, by any objective assessment, falls on the opposite end of the spectrum in terms of quality and return. This contradiction, however, is easy to understand when you look at the details of Buffett's investment in the Charlotte, N.C.-based bank. That is, he didn't buy common stock; he bought preferred stock, giving him both a guaranteed dividend and preference over common stockholders in the event of liquidation.

On top of this, as only Buffett could do, he convinced Bank of America to sweeten the pot by giving him warrants to buy 700 million shares of the bank's common stock at $7.14 each. At today's price, he's already made over $5 billion on the warrants alone. The deal, in other words, was simply too good to pass up irrespective of Bank of America's well-publicized failings. And, as such, it should be looked at as an outlier to Berkshire's other bank holdings.

With this in mind, in turn, we can circle back to the lesson of the chart above. That is, Buffett's long-term holdings, at least in the banking space, are all in best-in-class companies. Investors that seek to follow his lead would be wise to remember this.

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John Maxfield has no position in any stocks mentioned. The Motley Fool recommends American Express, Bank of America, Berkshire Hathaway, Coca-Cola, and Wells Fargo; owns shares of Bank of America, Berkshire Hathaway, Coca-Cola, and Wells Fargo; and has options on Coca-Cola and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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