Warren Buffett has said in the past that it's "far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
To me, this describes JPMorgan Chase (NYSE:JPM) to a tee.
America's biggest bank
JPMorgan Chase didn't become the biggest bank in America by accident. It emerged atop the industry in the wake of the financial crisis.
Its two principal competitors at the time, Bank of America and Citigroup, had to run hat in hand to the federal government for funds to survive. In JPMorgan Chase's case, the exact opposite was true. The government approached it for help to bail out Bear Stearns and Washington Mutual.
This happened eight years ago, but it's the culture at JPMorgan Chase that positioned it to thrive through the crisis. And that culture is still present, overseen by chairman and CEO Jamie Dimon.
No human being is infallible and I'm sure that Dimon has plenty of his own shortcomings, but everything I've read, seen, and heard about him suggests that he's one of this generation's best bankers. Richard Bove, an experienced and respected bank analyst, once told me that Dimon is one of the smartest people he's ever met.
Warren Buffett's take on JPMorgan Chase
And you don't just have to take my word for it. Buffett has said in the past that Dimon's annual shareholder letter is a must read. And one of Buffett's lieutenants just joined the JPMorgan Chase board.
That's about the best seal of approval that a bank can get, when you consider that Buffett's Berkshire Hathaway has accumulated the most impressive portfolio of bank stocks since the days of the Money Trust in the early 1900s.
All of this matters because, as Buffett explained in his 1990 shareholder letter, the quality of executives at a bank is more important than in any other business:
When assets are twenty times equity -- a common ratio in [the bank] industry -- mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the "institutional imperative:" the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so. In their lending, many bankers played follow-the-leader with lemming-like zeal; now they are experiencing a lemming-like fate.
A low valuation
Making JPMorgan Chase even more attractive is the fact that its shares trade at a fair price. They're priced at less than 1.1 times book value while the average bank on the KBW Bank Index, which tracks two dozen large-cap bank stocks, is priced at just under 1.2 times book.
Think about that for a second. JPMorgan Chase is one of the best-run banks in the country, yet its shares trade for less than the typical large-cap bank.
Part of this is because the nation's biggest banks are subject to stricter regulations surrounding capital, liquidity, and stress testing, among other things. The environment right now is also unusually inhospitable for banks, thanks to ultralow interest rates and higher regulatory and compliance costs.
Another explanation for JPMorgan Chase's low valuation, in my opinion, stems from the reputational damage that's been done to the industry during and after the 2008 crisis. All banks are trading for low multiples right now, not just JPMorgan Chase, but the big banks suffered the brunt of the damage to their reputations.
This may seem like it's unusual, but it's standard operating procedure in a cyclical industry. The same thing happened after the Panic of 1907, the Great Depression, and the multiple crises of the 1980s.
When things turn around and interest rates belatedly rise, then banks like JPMorgan Chase will make a lot more money. That will send bank share prices up and reward investors who get in now.
In short, every once in a while you get the chance to, in Buffett's words, "buy a wonderful company at a fair price." This is one of those times.