Buffett Right on U.S. Banks

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

I'm here at the Value Investor Conference ahead of the Berkshire Hathaway Annual Meeting.

One of Buffett's big bets recently has been on domestic banks. He owns a big chunk of Wells Fargo, and he also has a big financial interest in Bank of America. But is this going to pay off for him? We talked to several Buffett authors to see what they had to say.

Robert Hagstrom: Well, when you think about the big one, Wells Fargo, which we have in the portfolio, I would think that that is a good call option on the housing recovery. So what we're looking for--I think Warren was early on calling the recovery in housing--but he has said that housing is bottom, and it now needs to start to improve. When housing starts to improve, I think you'll see banks start to do a little better. Loans will start to go up, and they'll start to improve. So I think overall, they will be good investments. They may not be great investments, but they'll be good investments.

Robert Miles: Well, he knows banks well; in 1969, when he was 39 years old, he bought the Illinois National Bank, based in Rockford, Ill., which used to be the most profitable bank in the United States. He would still own that bank today, [but after 1981], because of the Federal Bank Holding Act, insurance companies couldn't own banks.

So he's got a long history of knowing and understanding banks. He was once asked a few years ago during the last crash, 2008, if he could put his money in just one stock, [which would it be?]. He hesitated for a second, and said it would be Wells Fargo, which was then trading at about $9. So that's a pretty big vote of confidence in domestic banking. He understands it.

Jeff Matthews: I hope he is right. I hope he is right. Personally, I've been in business for 30 years. I started as an oil analyst. I've done a lot of consumer investing in my time. I've never done much in financials. I've run a hedge fund for ... 19 years as of today. We've made a pretty major commitment to financials, because I happen to think two things:

Number one, the U.S. financials system really cleaned up its act over the last three years. I think the Europeans are going through the issue now, but the European banks hold a lot of stuff that U.S. banks got rid of three years ago, and the U.S. banks are in much better shape than most people, I think, generally believe.

Number two, I personally think Buffett is exactly right on housing. I think it's a great time to buy a single-family home. I think it's a no-brainer. I think it's an investment of a lifetime. Rates are low, at historic lows. Prices are below replacement cost. Everyone is still bearish. Everyone feels bad about their house. Everyone has reasons why you shouldn't own a home, and I think it's a wonderful time to own a home. So my view is that real estate will recover. If real estate recovers, if I'm right about that, I think the banks are the single biggest beneficiary of that.

So as an investor--and I'm not touting my services, I could be wrong, I could change my mind tomorrow--but I agree with him a hundred percent.