Warren Buffett dumped a bunch of bank stocks before their epic tumble this year, escaping some major pain

• Warren Buffett dodged some of the painful downturn in banking stocks this year.
• Berkshire Hathaway has exited Wells Fargo, Goldman Sachs, and other lenders since early 2020.
• Buffett said he soured on some banks after they misled investors and made basic mistakes.

Warren Buffett's mass sale of bank stocks is looking mighty shrewd given Wall Street's troubles this year.

Since the start of 2020, the famed investor's Berkshire Hathaway has exited a bunch of lenders that have seen big sell-offs this year: Wells Fargo (-5%), BNY Mellon (-9%), Goldman Sachs (-14%), M&T Bank (-23%), US Bank (-28%), and PNC Financial (-30%). One notable exception among the disposals is JPMorgan (+5%), but even Jamie Dimon's banking behemoth has trailed the S&P 500 (+9%) in 2023.

Berkshire's second-quarter earnings show the market value of its banking, financial, and insurance stocks was $67 billion at the end of June, with a cost base of $24 billion. That chunk of the conglomerate's stock portfolio was worth $102 billion and had a $40 billion cost base at the close of 2019. Moreover, it made up just 19% of the total value of Berkshire's portfolio in June, down from 41%, underlining the scale of Berkshire's disposals in the period.

Buffett explained in April that he soured on the banks because some of them were inflating their profits and misleading investors by valuing their assets at cost instead of market value. He also blasted them for making the basic error of mismatching their assets and liabilities. For example, they took in customer deposits that could be withdrawn instantly, and used them to buy long-dated bonds.

"I did think that banking could get in a lot of trouble just because of the kind of things that they did," the Berkshire CEO said. "I didn't like the banking business as well as I did before."

Buffett also hinted that he sold Wells Fargo, once a lynchpin of Berkshire's portfolio, because the bosses of the scandal-hit bank hadn't been sufficiently punished. He was careful not to accuse any particular bank of misdeeds.

Bank stocks have tumbled this year for a few reasons. Investors fear a repeat of this spring's regional-banking crisis, when a trio of lenders imploded after worries about unrealized losses in their bond portfolios spurred customers to yank their deposits in droves.

There's also concern about smaller banks' exposure to commercial real estate. The sector relies heavily on debt, has seen asset values tumble due to higher borrowing costs and the remote-working boom, and remains in the throes of a credit crunch as lenders pull back.

Moreover, several experts have warned that a slowing US economy, a historic rise in interest rates, unprecedented amounts of government debt, foreign conflicts, and other challenges could turn the screws on banks and cause a financial crisis. 

It's worth emphasizing that Buffett and his team haven't sworn off banks entirely, and they haven't escaped this year's downturn unscathed. Bank of America is still Berkshire's number-two holding after Apple, and its stock has plunged by 23% since the start of January. Berkshire also holds positions in other banks like Citigroup and Jefferies, and credit-card providers like American Express and Capital One.

Berkshire is slated to release its third-quarter earnings and stock-portfolio update by mid-November. Those filings should reveal the impact of the banking downturn on its finances, and whether Buffett and his team made any purchases or sales in the embattled sector last quarter.