Warren Buffett has been pulling the investing strings at Berkshire Hathaway (BRK.A 0.61%) (BRK.B 0.79%) for a half-century. Even with Todd Combs and Ted Weschler now managing billions of company capital in their own right, Buffett's stamp on the company's stock portfolio will be felt for many years to come. Moreover, with Buffett's own wealth made up of Berkshire stock, it's not really a stretch to think of the Berkshire portfolio as Buffett's portfolio, too. 

And if there's one big takeaway from the company's latest 13-F filing, the quarterly disclosure of its equity holdings, it's that Warren Buffett isn't shy about investing in an industry he knows well and sees as well positioned for big profits. According to its most-recent 13-F, Berkshire Hathaway has a massive $94.9 billion invested in financial services companies, or nearly half of the $199 billion stock portfolio. 

Money on a scales.

Image source: Getty Images.

Banks dominate the Berkshire portfolio

There were 16 dcompanies in the financial services industry as of the end of the first quarter. Here they are, listed in order of the size of Berkshire's stake at quarter's end:

Company Shares Market Value
Bank of America (BAC 0.09%) 896,167,600 $25,451,159,840
Wells Fargo (WFC -0.16%) 409,803,773 $18,723,934,388
American Express (AXP 0.02%) 151,610,700 $18,041,673,300
US Bancorp  129,308,831 $6,672,335,680
JPMorgan Chase 59,514,932 $6,590,088,420
Moody's 24,669,778 $4,585,124,939
Bank of New York Mellon 80,937,250 $3,729,588,480
Goldman Sachs 18,353,635 $3,623,191,085
Visa 10,562,460 $1,731,504,068
Mastercard 4,934,756 $1,244,545,463
PNC Financial Services 8,671,054 $1,128,797,810
M&T Bank 5,382,040 $881,093,768
The Travelers 5,958,391 $878,683,921
Synchrony Financial 20,803,000 $726,440,760
StoneCo  14,166,748 $366,635,438
Torchmark  6,353,727 $555,252,203
Total Market Value   $94,930,049,563

Data source: Berkshire Hathaway 13-F filing. Berkshire share count as of March 31, 2019. Market value as of closing prices on May 17, 2019.  

Of the $95 billion Berkshire had invested in financials, the vast majority of that amount -- $85.6 billion at recent prices -- was held in banks. Moreover, three of Berkshire's five biggest investments, and six of its 10 biggest individual holdings, are banks. 

Why does Berkshire own so much bank stock?

Buffett has had an interesting relationship with the banking industry over the decades. On one hand, he's pointed to the inherent risk that banks have -- they are very leveraged, typically lending out about 90% of their capital, leaving them potentially exposed to even a scent of financial troubles.

The 2009-2010 global financial  risis was an example of how bank leverage can go horribly wrong, and while that was by far the worst banking crisis in nearly a century, history tells us that banks tend to see some sort crisis nearly every decade, when one bad actor gets, well, creative with their practices and a handful of others soon follow. Yet the best-run, best-capitalized banks can also make for excellent investments over the long term. Two of Berkshire's largest holdings, Wells Fargo, and American Express, prove this point out.

Buffett made the call to invest heavily in both more than 20 years ago, spending less than $10 billion to buy its stake in Wells and $1.29 billion on American Express. As of this writing, the $11 billion and change Buffett spent on those investments is worth almost $37 billion, while paying Berkshire over $1 billion in dividends last year. 

Similarly, its stake in Bank of America -- a far more recent investment coming out of the financial crisis --  cost $11.7 billion but is now worth more than $25 billion and generated $551 million in dividends in 2018. 

Moreover, these top banks have a lot in their favor in the years ahead. After spending most of the past decade at record low levels, interest rates started rising a couple of years ago, something that's already boosting earnings at America's biggest banks.

BAC EPS Diluted (TTM) Chart

BAC EPS Diluted (TTM) data by YCharts

The Federal Reserve isn't likely to raise rates again this year, but the combination of reduced regulation in recent years along with expectations that rates will again start climbing in 2020, are two key factors in favor of seeing banks continue a strong run of earnings growth in the years ahead. 

Buffett's aggressive move to invest tens of billions of dollars in America's biggest banks over the past decade indicates that the Oracle of Omaha is also quite bullish on banks as a category. 

Should you follow Buffett into banks?

I tend to agree with Buffett's expectation that banks should do well in the future. But with that said, it's important to remember -- you aren't Warren Buffett. And by that I mean don't take the Berkshire portfolio model and put half your equity allocation into banks. 

In addition to holding almost $200 billion in stocks, Berkshire has about $115 billion in cash. Subtract the cash and stocks from its $500 billion market cap, and you have about $185 billion in value that's tied to Berkshire's cash-cow operating businesses, including Geico and BNSF Railways. That substantially alters how banks fit in Berkshire's asset allocation. 

With that said, yes, banks should be a key part of most investor's portfolio, particularly high-quality businesses such as Wells Fargo and Bank of America. As much as both have done very well for Berkshire over the years, they still represent great value today. Just don't go overboard and risk more capital than you can afford to lose.