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Stock Strategist

Banking Lessons from Buffett

The Oracle's timeless advice points to today's true bargains in banking stocks.

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Recent events in the financial markets have taken a heavy toll on the stock prices of many banks, with many such stocks trading at multiyear lows. However, not all financial institutions are created equal, as shareholders of Bear Stearns and  Countrywide Financial (CFC) learned in recent months. With that in mind, we looked to  Berkshire Hathaway's (BRK.B) Warren Buffett for help in separating the wheat from the chaff.

"The banking business is no favorite of ours," Buffett wrote in his 1990 letter to Berkshire Hathaway shareholders. "When assets are twenty times equity--a common ratio in this 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." While Buffett was referring to the S&L crisis at the time, he could easily have been discussing the current problems in the mortgage market.

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Jim Sinegal has a position in the following securities mentioned above: BRK.B. Find out about Morningstar’s editorial policies.