Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) has amassed an unparalleled portfolio of high-performing bank stocks under Warren Buffett's stewardship. But even a cursory glance at its holdings reveals a noticeable absence: JPMorgan Chase (NYSE:JPM).
It hasn't escaped Buffett's attention that JPMorgan Chase is one of the best run banks in the country. In fact, Buffett admits to owning shares of the $2.4 trillion bank in his personal portfolio.
"I'll let you in on a little secret," the 85-year-old billionaire told CNBC's Andrew Ross Sorkin four years ago. "I own some shares of JPMorgan. Personally."
Buffett has also praised JPMorgan Chase's CEO Jamie Dimon on multiple occasions over the years. In his 2011 shareholder letter, Buffett explicitly recommended that investors read Dimon's letter. The Berkshire CEO followed this up by telling CNBC's Becky Quick:
I think Jamie Dimon writes the best annual letter in corporate America. Every viewer will learn a lot by reading his annual report. He thinks well and he writes extremely well and he works a lot on his report.
This begs the question: If Dimon is so brilliant (which I've heard from other reputable sources, including well-known bank analyst Dick Bove, who once told me that Dimon is one of the smartest people he's ever met), then why hasn't Buffett added JPMorgan Chase to Berkshire's portfolio?
The only answer Buffett has given until recently is that a bank like Wells Fargo (NYSE:WFC), which happens to be Berkshire's second largest common stock holding, uses a simpler business model. "I know Wells better and it's easier to understand," he said at the 2012 shareholder meeting.
Flash forward to Berkshire Hathaway's most recent shareholder meeting, and we finally have a much better appreciation for what Buffett means by this. "I regard very large derivative positions as dangerous," he said last weekend in Omaha, Nebraska.
Some of these things get so complicated they're very hard to evaluate ... I know one that's so mismarked it would blow your mind, and the auditors I don't think are necessarily capable of holding that behavior in check.
This is why Buffett told Berkshire shareholders that, "if you take the 50 largest banks in the world, we wouldn't even think about probably 45 of them."
How does JPMorgan Chase measure up in this regard? It has a larger portfolio of derivatives than any other bank in the country. With $50.7 trillion in notional derivatives exposure, it comfortably outpaces the runner-up Citigroup's $48 trillion portfolio. Bank of America comes in third at $42.2 trillion. And Buffett's favorite Wells Fargo ranks fourth with only $5.7 trillion worth of notional derivatives exposure.
Thus, one way to explain JPMorgan Chase's absence from Berkshire's portfolio is because the bank's derivatives portfolio is simply too big for Buffett.