Warren Buffett and Berkshire Hathaway‘s (NYSE:BRK.A) decision to purchase $5 billion of Bank of America’s (NYSE:BAC) preferred stock brings back echoes of 2008, when he came to the rescue of Goldman Sachs (NYSE:GS) by buying the same amount of preferred.
At the time, Buffett’s buy was seen as a vote of confidence in the beleaguered U.S. financial system. Buffett said of his decision, “Goldman Sachs is an exceptional institution. It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”
Similarly, Buffett said about his BAC purchase, “Bank of America is a strong, well-led company, and I called (Bank of America CEO) Brian (Moynihan) to tell him I wanted to invest in it.”
Naturally, this news sent Bank of America soaring — the stock was up as much as 25% at the open before giving back ground. So does this signal the end of the bear market in financial stocks? Possibly, but a look at history shows that this doesn’t necessarily mark the bottom.
Buffett’s purchase of Goldman’s preferred occurred on Sept. 23, 2008. As is the case now, the news boosted both the stock and the broader market initially. However, Goldman’s stock lost nearly 50% of its value in the following two months, and it didn’t reach its bottom until Nov. 21. The financial sector as whole — as gauged by the Financial Select Sector SPDR ETF (NYSE:XLF) — didn’t touch its bear-market low for several months after that, on March 9, 2009.
Of course, Buffett’s purchase of Goldman eventually worked out quite well for him — he made billions on the deal. His purchase of Bank of America is therefore an important signal to the markets, particularly in light of the company’s need for a capital infusion and the recent negative press it has received in the blogosphere. Still, as Jeff Reeves points out, BAC continues to face significant challenges.
Investors should therefore take this news with the proper historical perspective, which shows that even Buffett can be off by a few months — and many percentage points — with his timing. As long as the problems with housing, economic growth and the European debt crisis continue to hang over the market, investors who want to make a play on the banking sector would be better served by focusing on the highest-quality and better-capitalized companies in the group.