The Big Mystery Bet on Berkshire Hathaway Stock May Be Revealed Soon

Berkshire Hathawayled by legendary investor Warren Buffett, has been making a confidential bet on the financial sector since the third quarter of last year.

The identity of the security(s) Berkshire acquired could be revealed Saturday at the company’s annual shareholder meeting in Omaha, Nebraska.

Indeed, unless Berkshire obtains confidential treatment on the investment for a third consecutive quarter, the stake will be disclosed in filings later this month. So the 93-year-old Berkshire CEO might decide to explain his reasoning to the thousands of investors flocking to the gathering.

The bet, shrouded in mystery, has captivated Berkshire investors since it first appeared in disclosures late last year. At a time when Buffett is a net seller of stocks and laments the lack of opportunities that can “really shake things up at Berkshire,” he’s apparently found something he likes — and in finance, no less. .

This is an area it has backed away from in recent years due to concerns about rising defaults. High interest rates have taken a toll on some financial players like regional U.S. banks, while making the return on Berkshire’s cash in instruments like Treasuries suddenly attractive.

“When you’re the GOAT of investing, people care about what you think is good,” said Bill Stone, chief investment officer of Glenview Trust Co., using the acronym for Greatest of All Time. “What makes things even more exciting is that banks are part of his circle of competence.”

Under Buffett, Berkshire beat the S&P 500 for nearly six decades with a compound annual gain of 19.8%, compared to the index’s 10.2% annual rise.

Berkshire requested anonymity for the transactions because if the stock became known before the conglomerate finished strengthening its position, others would also invest in the stock, driving up the price, according to David Kass, a finance professor at the University of Maryland.

Buffett reportedly controls about 90% of Berkshire’s huge stock portfolio, leaving the rest to his deputies Todd Combs and Ted Weschler, Kass said.

Although the investment disclosures don’t give any insight into what the stock might be, Stone, Kass and other Buffett watchers believe it’s a multibillion-dollar bet on a financial name.

Indeed, core costs for banks, insurers and company-owned financials jumped $3.59 billion in the second half of last year, the only category to increase, according to separate Berkshire filings. .

At the same time, Berkshire retreated from financial names by abandoning insurers. Markel And Global lifeleading investors to estimate that the bet could reach $4 billion or $5 billion by the end of 2023. It is unclear whether this bet was on a single company or multiple companies in an industry.

If this were a classic Buffett bet – a large stake in a single company – this stock would have to be large, with a market cap of perhaps $100 billion. Holdings of at least 5% in publicly traded U.S. companies trigger disclosure requirements.

Investors have been speculating for months about what the stock could be. Finance covers all kinds of businesses, from retail lenders and Wall Street brokers to payment companies and various insurance industries.

Charles Schwab Or Morgan Stanley could do the trick, according to James Shanahan, an Edward Jones analyst who covers banks and Berkshire Hathaway.

“Schwab took a beating in the regional banking crisis last year, they had a problem where retail investors were swapping their cash for higher-yielding investments,” Shanahan said. “No one wanted to own that name last year, so Buffett could have bought as many as he wanted.”

Other names that have circulated… JPMorgan Chase Or black rockfor example, are possible, but may make less sense given valuations or business mix. Truist and other higher quality regional banks could also fit Buffett’s parameters, as could insurers AIGShanahan said, although their market caps are smaller.

Berkshire has owned financial names for decades, and Buffett has repeatedly stepped in to inject capital — and confidence — into the sector.

Buffett served as CEO of scandal-hit Salomon Brothers in the early 1990s to help turn around the company. He injected 5 billion dollars into Goldman Sachs in 2008 and an additional $5 billion Bank of America in 2011, ultimately becoming the latter’s largest shareholder.

But after stocking up on lenders in 2018, from universal banks like JPMorgan to regional lenders like PNC Financial And American Bankit deeply reduced its exposure to the sector in 2020, fearing that the coronavirus pandemic would punish the industry.

Since then, he and his deputies have largely avoided increasing his financial holdings, beyond modest positions in Citi Group And Capital one.

Last May, Buffett told shareholders to expect more turmoil in the banking industry. He said Berkshire could deploy more capital into the industry, if necessary.

“The situation in banking is very similar to what it has always been in banking, which is that fear is contagious,” Buffett said. “Historically, sometimes fear was justified, sometimes not.”

Wherever he placed his bet, the move will be seen as a boost for the company, perhaps even for the sector, given Buffett’s ability to identify value.

It’s unclear how long regulators will allow Berkshire to protect its shares.

“I hope he reveals the name and talks about the strategy behind it,” Shanahan said. “The SEC’s patience may wear thin, at some point it will appear that Berkshire is receiving favorable treatment.”

— CNBC’s Yun Li contributed to this report