Warren Buffett always recommends that you invest in a business that you understand, and he even goes so far as to say that “diversification is a safeguard against ignorance.” However, this quote is more for people who should know what they are doing, that is, seasoned investors rather than retail investors who just want to build a nest egg.
Buffett really lives by his own words. After a long quiet period, which has made many speculators wonder why the Wizard of Omaha was sitting on a huge pile of cash and not shopping in the COVID-19 crash, he is now shopping.
The first major move was its play on gas and the purchase of a huge pipeline, adding to its already impressive energy empire. Its recent investments concern banks, in particular Bank of America.
Bet on banks
Bank of America is the second largest bank in the country and one of the 10 largest banks in the world. Buffett was always nice to banks and had quite a few in his wallet. But the back-to-back investment of nearly $ 1.2 billion in Bank of America (over $ 800 million previously, $ 400 million now) has raised some questions. Most importantly, “Have the banks fallen as much as they would in this recession?”
This is an important question because when Buffett wasn’t buying during the crash, people wondered if or it was because he thought another stock market crash was on the horizon. Now that he is buy, people are wondering if the bank is now really on the road to recovery.
If so, Canadian investors may want to consider adding a bank to their portfolio while it still has a discount tag. Toronto-Dominion (TSX: TD) (NYSE: TD) is still trading at a price 18% lower than its pre-pandemic value.
The second largest of the Big Five
Toronto-Dominion trades at $ 59.9 per share at time of subscription. While the price has recovered by around 21.5% since its March crash, the recovery is not the fastest of the bunch. The big five all struggle to fully regain their pre-pandemic momentum, and TD is 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 huge footprint in the United States. Retailing in the United States is a decent part of its high-end retail income mix.
Of the more than 26 million customers, 16 million are Canadians and approximately nine million customers are from the United States, making it one of Canada’s most American banks. And since Buffett generally bets on the US economy, his recent Bank of America buy-in could be a harbinger of good things to come.
This is a wave on which the TD is best placed. And that will also allow you to reap a juicy yield of 5.3%.
Take away idea
Canadian banks have always been strong and have resisted test of time better than most banking sectors in the world. But with a looming recession and an expected real estate crash, the recovery could be delayed a bit. So even if you subscribe to TD, don’t expect it to make you rich in a matter of months.
Buffett plays the long game, and if you want to emulate him, be comfortable with buying and holding for years.