What Warren Buffett Has in Common With Willie Sutton

Among the more humorous and memorable misquotes of the 20th century was Willie Sutton's apocryphal response to a reporter asking him why he robbed banks: "Because that's where the money is." But while Sutton didn't actually say that, Warren Buffett is apparently on that same page when it comes to financial institutions: When Berkshire Hathaway (BRK.A -0.56%) (BRK.B 0.07%) gave the details on its holdings this week, half of the biggest holdings were banks.

In this segment of the podcast, MarketFoolery host Mac Greer, along with senior analysts Andy Cross and Ron Gross, reflect on how the investing guru is doing so well with what, at first glance, might seem to be a fairly boring portfolio.

A full transcript follows the video.

This video was recorded on Nov. 15, 2018.

Mac Greer: Speaking of nice performers, there's a guy named Warren Buffett who's got a pretty good track record, is my understanding, as an investor. His company, Berkshire Hathaway, just reported its third-quarter holdings. Boy, does Buffett, or someone over at Berkshire, really like banks. Guys, let me give you the 10 holdings quickly. See if you notice a theme here. Apple is the biggest holding. Then we've got Bank of America, Wells Fargo, [Coca-Cola], Kraft Heinz, American Express, US Bancorp, Moody's, Goldman Sachs, and JPMorgan Chase. Five of the 10 are banks!

Ron Gross: You look at this portfolio and you say, a bunch of banks and a bunch of consumer staple-ish stocks. It doesn't seem to be a very exciting portfolio.

Greer: The curmudgeonly trader, there you go again!

Andy Gross: [laughs] Mr. Buffett doesn't know what he's doing. When I think of Buffett, I think of that folksy guy who likes See's Candy kind of businesses, old economy types of businesses. But we forget, he's a student of financials, whether it be insurance or financial services or the big banks. You'll remember long ago, he was actually interim chairman of Salomon Brothers. Subsequently, in various financial crises, he's helped bail out more than one large bank. He understands these companies where I will say I tend to not, because they seem like a black box to me. He clearly does. And I think that makes him comfortable investing big portions of his portfolio, especially in this type of environment, where interest rates are going to start to rise, less regulation. He sees some good stuff on the horizon. And knowing what he knows about how these banks run, he's comfortable.

Greer: Does this get you more interested in banks, Ron?

Gross: No.

Cross: Warren Buffett has insights, like Ron was saying, into the financial world from his 60 years of investing in all types of businesses. He also has the Todd and Ted partnership, helping him out in the investing landscape as well. You look through his portfolio, you do see companies like the airline investments they've made over the last year or so, combined with a lot of financials. The financial investment doesn't really surprise me. Ron mentioned the rising interest rates. From a scale perspective, from competitive position, the largest banks continue to widen those moats.

Frankly, Mr. Buffett is not one that's going to pay 10 times revenues, per se, for software-as-a-service companies. And he has a lot of capital to put the work. They have $100 billion in cash on the balance sheet. They generate so much cash from their operating businesses to be able to invest. Making investments like this -- including Oracle, which they bought last quarter as well. These are the kinds of investments you expect to see from Berkshire Hathaway. Given the size of the organization and amount of capital they generate. and the traditional valuation bent and thinking, these don't really surprise me. These investments, he knows them well.

Gross: Yeah. It's good to see the Ted and Todd influence. Buffett was notorious for staying away from tech. He said it's because he couldn't understand it. It's not really about not understanding; it's about not being able to predict the future, which I completely understand. But it's nice to at least see him in consumer electronics like Apple; Oracle, a business where either he or Ted or Todd can understand. We saw recent investments in fintech, financial technology, companies. Good to see, because clearly, that's going to be a big place to put capital for the future. I like to see some of that in addition to the old Kraft, Coke, AmEx kind of stocks that he's owned forever.

Cross: And, by the way, let's not forget, he's also buying his own stock. They bought almost a billion dollars' worth of Berkshire Hathaway stock in the last quarter. That's significant. He doesn't really go out there and aggressively buy his own stock. Instead, he changed his methodology for thinking about when to buy that stock from a price-to-book value target to "when we think the stock is undervalued." And they bought a bunch last quarter.

Greer: I'll be curious to see if he starts buying even more Apple. For perspective here, Apple, his largest position by far, almost $57 billion worth of Apple stock. Bank of America, around $25 billion. Wells Fargo, $23 billion. Apple, far away.

Gross: I would imagine, with the Apple weakness that we've seen lately, he's in the market buying more. That's just a guess. I don't think he gets hung up as much as traditional Wall Street does on the quarter-to-quarter iPhone unit sales numbers. I think he's thinking longer-term about what Apple will do, in terms of generating cash flow and buying back stock over the next five or 10 years. So I would imagine he's increasing his position on this weakness.

Greer: If I'm an investor, and I hear about these 10 holdings, and I'm like, "Buffett's had an incredible track record. One of the most successful public market investors in history. Why not just mimic this portfolio?" Why shouldn't I just go out and buy these 10 stocks?

Cross: I think you'd be better off buying Berkshire Hathaway.

Gross: You could mimic these stocks, but then what? He's constantly changing the portfolio, adding to other companies. But more important, you're getting all the operating businesses of Berkshire Hathaway, which are generating all those billions of dollars of cash flow. Geico generating the float capital, which you then can invest in stocks. Just buying these publicly traded companies, you would not be getting all those operating businesses as well.

Cross: I think if you want to go investing in some of these businesses, they can be fine investments. But considering he was buying his own stock, and he's pretty particular about when they buy that stock... Berkshire Hathaway is one of my largest personal positions.

Gross: Me, too.

Cross: I think the stock is undervalued now, so if you wanted to put your money behind Mr. Buffett and that team, especially with the insurance operations that Ron mentioned and the operating businesses, buy Berkshire Hathaway.