Warren Buffett always recommends that you should invest in a business that you understand, and he even goes as far as saying that “Diversification is a protection against ignorance.” However, that quote is more for people who should know what they are doing i.e., seasoned investors rather than retail investors who simply want to build a nest egg for themselves.
Buffett is truly living by his own words. After a long quiet stretch, which made many speculators wonder why the Wizard of Omaha was sitting on a huge cash pile and not shopping around in the COVID-19 crash, he is shopping now.
The first major move was his gas play, and buying a huge pipeline, adding to its already impressive energy empire. His recent investments are all about banks, particularly the Bank of America.
Banking on banks
Bank of America is the second-largest bank in the country and one of the 10 largest banks in the world. Buffett has always been sweet on banks and had quite a few of them in his portfolio. But the back-to-back investment of almost $1.2 billion in the Bank of America (over $800 million before, $400 million now) has raised a few questions. The most prominent one is, “Have banks fallen as much as they would in this recession?”
It’s an important question because when Buffett wasn’t buying during the crash, people wondered whether or it’s because he believes that another market crash is on the horizon. Now that he is buying, people wonder whether the bank is now truly on its way to recovery.
If that’s the case, Canadian investors might want to consider adding a bank to their portfolio while it still has a discount tag on. Toronto-Dominion (TSX:TD)(NYSE:TD) is still trading at a price of 18% down from its pre-pandemic value.
The second largest of the Big Five
Toronto-Dominion is trading at $59.9 per share at writing. While the price has recovered about 21.5% from its March crash, the recovery isn’t the swiftest of the bunch. The Big Five are all finding it hard to regain their pre-pandemic momentum fully, and TD sits squarely in the middle when it comes to recovery.
One of the reasons to consider TD over others, especially if you want to emulate Buffett’s move, is its massive U.S. footprint. The U.S. retail makes up a decent portion of its premium retail earnings mix.
Out of its 26+ million customers, 16 million are Canadians and about nine million customers are from the U.S., making it one of the most American Canadian banks. And as Buffett typically bets on U.S. economy, his recent Bank of America buy-in might be a precursor of good things to come.
This is a wave the TD is in the best position to ride. And it will also let you bag a juicy 5.3% yield.
Canadian banks have always been rock solid, and have stood the test of time better than most banking sectors worldwide. But with a looming recession and an expected housing crash, the recovery might be a bit delayed. So even if you do buy into TD, don’t expect it to make you rich in a few months.
Buffett plays the long game, and if you want to mimic him, get comfortable with buying and holding for years.
Fool contributor Adam Othman has no position in any of the stocks mentioned.