One of Warren Buffett's most well-known investing maxims is to be greedy when the rest of the market is in a panic, and over the years, that mantra has paid dividends. Back in 2011, bank stocks were being dumped following the collapse of Lehmann Brothers, but Buffett made a shrewd bet on Bank Of America, and, as of today, his initial investment has more than doubled in value.
A calculated risk
Bank of America, like many other banks in America, was in deep trouble back in 2011 when Buffett made his $5 billion investment and at the time it looked like a big risk. The idea, however, was to bring the bank back to good health with the injection of much-needed capital and there is no doubt that Buffett's strategy has proven to be another masterstroke. It is interesting to note that the idea that the bank could be turned around came to Buffett while he was taking a bath.
He got preferred shares in the bank at a knockdown price of less than $10 back in August 2011 but the value of his holding has risen considerably over the years.
Bank of America was trading at around $24 today. Buffett is now going to swap his preferred stock with 700 million common shares that will make his firm Berkshire Hathaway the largest investor in the bank. Buffett's total holding in Bank of America now shows a profit of around $12 billion and considering his track record for being a long-term investor, he is surely in no hurry to cash in on his profits.
He is big on finance
This investment in Bank of America is not an out of the way bet from Buffett. He has been building up a big portfolio of investments in financial institutions for a considerable period of time. Berkshire Hathaway's investments in financial institutions constitute 30% of the entire portfolio of the company and remain the company's biggest sector-wise investment at this point in time.
Even before the financial crisis of 2008, he had invested heavily in organizations like American Express, Wells Fargo, US Bancorp and M&T Bank.
Financial experts believe that Buffett's bullishness on the sector is primarily governed by his own belief that the banks and other financial institutions will continue to be essential to society for generations to come. He had made a $5 billion investment in Goldman Sachs as well following the financial meltdown. He had bought the shares for less than $50 and today the shares were trading at $223, thereby confirming yet again that Buffet's ability to identify market inefficiencies remains stronger than ever.