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Billionaire investing success Warren Buffett does not like owning bonds at this point, and he thinks the average investor should avoid them as well.

The chairman and CEO of Berkshire Hathaway, major investment conglomerate, believes that individual investors should have plenty of cash on hand so they are comfortable just in case something unexpected happens.

He also believes that they should invest the rest of their money in stocks, even though the price of stocks has risen quite higher than they were years ago when the Great Recession first hit.

On Monday while giving an interview on CNBC, Buffett told the world that bonds are a terrible investment at the current time, and he also mentioned that long-term bond owners may see large losses once interest rates eventually rise again.

The Oracle of Omaha also said that stocks are selling for very reasonable prices generally even though the Dow Jones Industrial average is seeing record high levels, along with the S&P 500 index.

Buffett, 82 years old, also mentioned that he doesn’t have any plans to retire in the near future, and he also believes the efforts of the Federal Reserve, with keeping interest rates low, have helped the stock market. Income improvements continue to play a role for stocks as well.

Buffett is a continued fan of Federal Reserve Chairman Ben Bernanke, and he mentions that he believes bond prices are artificially inflated because of the stimulus that is ongoing from the Federal Reserve. The stimulus is $85 billion worth of bonds being bought every month, which keeps the interest rates at a low level. At this time, bond yields are near historic lows, and they move inversely to prices.

On Monday, Buffett gave interviews to Fox Business News and CNBC after Berkshire Hathaway’s annual shareholders meeting this past weekend. It was a star-studded event.

At the time of this writing, Berkshire Hathaway owns more than 80 companies and has large investments in IBM, Coca-Cola and Wells Fargo, as well as other iconic brands.

Buffett also reiterated his support of Jamie Dimon, J.P. Morgan Chase chairman and CEO. He said that Chase has the right person running the show, and he also owns the stock as part of his personal portfolio.

Buffett also believes that Berkshire Hathaway will own a stake in H.J. Heinz – the ketchup maker – forever, and he said that he didn’t have any problem taking on 3G Capital as a partner. They are the Brazilian investment firm that split the bill for H.J. Heinz. He also hopes that the Berkshire Hathaway stake in Heinz will grow as time goes by.

He was also questioned about the way the Heinz deal was structured. People wonder if the 50% split is a change in the way Berkshire Hathaway will invest and do business from now on. Berkshire Hathaway typically buys a company outright, and they let the company run without any intervention whatsoever.

3G Capital is not your typical private equity firm, said Buffett, since they put a large amount of their own money in deals, and they also run businesses.

Buffett even mentioned that Burlington Northern Santa Fe railroad’s traffic is picking up, but it’s probably going to haul fewer carloads than it did before the recent recession.

Burlington Northern Santa Fe “has been a terrific acquisition for Berkshire,” said Buffett.

BNSF contributed $798 million to Berkshire Hathaway’s $4.9 billion profit for the first quarter, which the company reported on Friday. Berkshire Hathaway’s profits rose by over 51%, beating last year’s net income of $3.3 billion by a wide margin.

In recent years, Warren Buffett has had an incredible appetite for buying shares of the San Francisco-based bank Wells Fargo. It is now the biggest public investment in the Berkshire Hathaway portfolio.

Wells Fargo recently pushed aside the long-standing Coca-Cola, which Berkshire Hathaway began purchasing in late 1987, and finally stopped in 1995. He believed that the true value of Coca-Cola will was not reflected in the share price at the time. Considering the fact that Coke remained the largest holding for Berkshire Hathaway for many years lets us know how well it performed for Buffett and company.

Warren Buffett has been adding to his will far goes holdings for quite a few years. The consistent purchases has prompted it to become Berkshire Hathaway’s largest holding.

Berkshire Hathaway’s last regulatory filing shows us that they added another 17.3 million shares of Wells Fargo during the last quarter. That brings the total holding to 439.8 million shares. Warren Buffett has been the largest shareholder of Wells Fargo for quite some time.

Berkshire Hathaway stake in Wells Fargo is roughly worth around $15.5 billion. The Coca-Cola stake is currently valued at $14.7 billion.

There is no question that Warren Buffett is going to spend some of his time writing about Wells Fargo in the upcoming letter to Berkshire Hathaway shareholders. The letter will be distributed after the market closes on March 1.

Warren Buffett has talked about Wells Fargo being his favorite bank in the past, and regularly mentions the banks low cost of funding. This is a powerful business advantage when the lending money. The chairman and CEO of Wells Fargo, John Strumpf, says he begins his day by reviewing the deposit figures of the bank.

Wells Fargo is currently the fourth largest bank in the United States according to assets. They recently had to relinquish their title of being the most valuable bank back to J.P. Morgan Chase.

Many people still believe that Wells Fargo will eventually be the largest bank in the United States one day.

They made a large step in that direction during 2008 when they purchased walkover you. There were a lot of mortgage woes when they made this deal, but the deal also turned Wells Fargo into a true national bank.

It was surprising to read that an analyst criticized the walkover you purchase as one of Wells Fargo’s recent mistakes. I wouldn’t be surprised if Buffett decides to pick up another few million shares because of the news.

Warren Buffett is a billionaire investor who has taken out stakes in some of the largest United States banks, who tells us that the lenders have rebuilt their capital to the levels where they aren’t a possible threat to the economy any longer.

“The banks will not get this country in trouble, I guarantee it,” said Buffett – the CEO and chairman of Berkshire Hathaway, based out of Omaha, Nebraska – in an interview that he gave over the phone last week. “The capital ratios are huge, the excesses on the asset side have been largely cleared out.”

Major lenders including Citigroup Inc. and Bank of America Corp. have sold off their assets, bolstered their balance sheets and cut many jobs after they repaid the 2008 taxpayer bailouts, when these companies were truly overwhelmed by losses on housing market related securities. All of those actions helped raise the value of Berkshire Hathaway’s holdings, and increase financial stocks at the same time.

Berkshire Hathaway has invested in at least four of the seven biggest lenders in the United States of America by assets, and has also taken out more than a $14 billion stake in Wells Fargo and Co., based out of San Francisco. They have a $5 billion stake in Bank of America, and they have $5 billion worth of warrants to purchase shares of Goldman Sachs Group Inc. Berkshire Hathaway has a stake in U.S. Bancorp as well.

“Our banking system is in the best shape in recent memory,” said Buffett.

Past bank regulators and executives tell us that the biggest lenders still pose some risk to the United States economy even four years after the bailout, plus 2 1/2 years since legislators passed the largest major reforms to regulation on Wall Street since the Great Depression.

Trading Loss

Last year, J.P. Morgan Chase and Co. took a trading loss of $6.2 billion, which reminded America of our concerns for the banking industry. Sandy Weill, former CEO of Citigroup, mentions that lending money and taking deposits should be split off from investment banking as a way to prevent another major financial crisis.

Other investors have also spoke about their doubts and the accounting of banks. Even after the stock rally last year, J.P. Morgan, Bank of America, Goldman Sachs and Citigroup are all trading at less their book value, which is a calculation of how much a company’s assets should be worth if you subtract their liabilities.

There were mergers taking place during the financial crisis that brought about criticism, saying that too big to fail banking companies are getting even larger. Buffett mentions that this shouldn’t worry investors at all. Canadian banks managed to get through this crisis a lot better than other banks in many nations, as the biggest firms in Canada took hold of more market share than their counterparts in the United States did.

U.S. Advantages

“We do not have an unusually concentrated banking system compared to the rest of the world, and there are certain advantages in the largest capital market in the world to have banks that are somewhat consistent with the size of those markets,” said Buffett.

The biggest United States banks are going to face another round of Federal Reserve stress tests to figure out whether or not they have enough capital to raise dividends and buy back shares of their stock. Brian T. Moynihan, CEO of Bank of America, tells us that he’s confident BOA is going to pass even though they failed in 2011, when he did not receive the approval to increase the dividend.

Buffett also lent Bank of America credibility by providing the bank capital during 2011, after the company saw a 45% decline in share price during an eighth month period. This trade also followed moves during 2008 that Warren Buffett made by helping out General Electric Company and Goldman Sachs during the financial crisis. Both of the companies bought back the preferred shares that they sold to Warren Buffett. He also expects that Bank of America may potentially do the same.

Improved Condition

“Their condition has improved so significantly, and interest rates are so low, that they have the chance to do a number of things in that respect,” said Buffett. “I may like to keep it, but if it makes sense for them to call it, they’re going to call it.”

The preferred shares that Berkshire Hathaway owns of Bank of America pay an annual dividend of 6%, and they can redeem them at any time for the amount of $5.25 billion, according to the terms of the deal that was made. The deal also gives Warren Buffett 10 year warrants to buy 700 million shares of common stock from Bank of America at $7.14 apiece. Bank of America recently closed at $11.43 per share. If Warren Buffett were to exercise that option at those prices, he would make about $3 billion.

Buffett mentions that Berkshire Hathaway is most likely going to wait toward the end of the contract before they exercise that option.

“We’re in no hurry,” said Buffett. “Nine years from now I would think that Bank of America as well as Wells Fargo and probably the other major banks will be worth considerably more than they are now.”

A spokesman for Bank of America named Larry DiRita chose not to comment on Warren Buffett’s Bank of America investment.

Their Tier 1 capital ratio has almost reached 9% as of September 30 based on the newest standards internationally, and it’s up from about 8% just three months earlier. Their long-term debt dropped to $286.5 billion by the end of the third quarter, and this is down from $399 billion just one year earlier.

Warren Buffett and Berkshire Hathaway are looking to obtain as much as $1 billion from Swiss Re, a reinsurer. They have a dispute with the company based upon a life insurance deal that the two businesses agreed upon in 2010.

Berkshire Hathaway is currently “alleging damages of between $0.5 and $1 billion,” said the company Swiss Re on the 73rd page of their earnings statement. This was made available to the public during the third quarter, and was issued on November 8. They also claim that the issue is without merit.

There was no one from Berkshire Hathaway or Swiss Re available to make a comment.

The claim that Berkshire Hathaway is making against the company was reported at first by the Insurance Insider newspaper this past Monday.

This past Tuesday, shares of Swiss Re were up about 0.8% at 6:25 in the morning Eastern time, and this is in line with the European insurance sector index. .SXIP.

An analyst from J.P. Morgan mentioned that Swiss Re wouldn’t have any problem meeting their current dividend forecasts whether they have to pay Berkshire Hathaway or not.

“Swiss Re’s capital is in our view strong enough to absorb this and still have the ability to raise the normal dividend and pay a special dividend too,” wrote J.P. Morgan in a note.

Both Berkshire Hathaway and Swiss Re have met to discuss the claim, but both parties could not come to a resolution. This can obviously lead to arbitration proceedings, which was also mentioned by the reinsurer in the same statement made available on November 8.

In 2009, Swiss Re, who is the number two reinsurer, received an emergency loan from Berkshire Hathaway in the amount of $3.3 billion. The loan was needed to offset heavy losses from different types of investments during the financial crisis. The loan has been repaid since then.

Within the business community, Warren Buffett is the greatest ally of President Barack Obama. There is even a proposal to raise taxes brought about by President Obama named the Buffett Rule, which obviously bears the name of the billionaire entrepreneur and investor.

And more often than not, President Obama appeals to the authority and business savvy of Warren Buffett when he needs someone to defend his policies. But some of the statements that Buffett made this week potentially tell us that he’s not completely sold on the policies of our current president.

In this past Sunday’s edition of the New York Times, they published an op-ed piece where some of Warren Buffett’s opinions differed on topics that both he and President Obama are both concerned. For starters, Buffett opposes an increase in taxes on those people making less than $500,000 a year. As of right now, President Obama is currently negotiating a tax deal where Republicans will have to accept rate hikes in households making $250,000 a year or more.

And in a personal interview that Warren Buffett gave on TV with Charlie Rose of PBS, he sang the praises of Jamie Dimon, CEO of J.P. Morgan Chase Bank. Buffett thinks he would make an excellent Treasury Secretary. The interesting thing is that Mr. Dimon very clearly opposes the economic policies of the president and has openly criticized them. I’m particularly talking about financial regulations brought about from the 2010 Dodd-Frank law.

But during his interview, Warren Buffett said that Jamie Dimon is “terrific” and also mentioned to Charlie Rose that “if we did run into problems in markets, I think he actually be the best person you could have in the job.”

Even though Warren Buffett is considered President Obama’s biggest cheerleader throughout the business community, it is apparent that they do not agree on everything. This is particularly true of tax and regulatory policies that are a big part of the president’s agenda.

Is Warren Buffett a hypocrite because of this? I don’t believe so, not anymore then his advocacy of the Buffett Rule, since he exposes very little of his own fortune to taxation.

President Barack Obama is currently looking to replace Tim Geithner as Treasury Secretary. Everybody’s favorite billionaire investor Warren Buffett thinks that the best person to lead the Treasury Department during the financial crisis is none other than the CEO of J.P. Morgan Chase, Mr. Jamie Dimon.

It is believed that Dimon is not one of the potential candidates in the running for this fantastic position in the cabinet, but it’s also not the first time that this banker on Wall Street has been recommended for the job.

“If we run into problems in markets, I think he would actually be the best person you could have in the job,” said Buffett during an interview that he had with Charlie Rose that aired on PBS this past Monday night. “World leaders would have confidence in him.”

It is currently believed that Jack Lew is the leading candidate to replace Tim Geithner. He is the former director of the Office of Management and Budget, and the current White House Chief of Staff.

There are a few others that are possibly under consideration as well. Some of the names floating around are Larry Fink, CEO of BlackRock; Roger Altman, chairman of Evercore; and Gary Gensler, current chairman of the Commodities Futures Trading Commission and former partner at Goldman Sachs.

Dimon has the reputation of being a safe and savvy banker, although that reputation took a little bit of a hit this year during the entire London Whale trading debacle. So far, this error cost J.P. Morgan $6.2 billion.

“Obviously, you know, there was a failure of control,” said Buffett to PBS when discussing the trading losses. “If you run an army, if you run a church, if you run a government, any large institution, people will go off the reservation sometimes.”

There was a time when Dimon was looked upon as a friendly Wall Street executive to the administration. But he has recently criticized the Dodd-Frank financial overhaul championed by President Obama, and he’s also criticized some of the policies implemented by the Federal Reserve.

As of this time, Geithner is leading the negotiations in regards to the fiscal cliff. He is expected to leave his post once a potential deal is reached.

When most people think of Warren Buffett and bank stocks, they usually think about the ever-expanding Wells Fargo and Company. But if you happen to take a look at the last 13 – F, you’ll see that Warren Buffett decided to triple his overall position in another bank stock. This actually suggests to me that there’s more than one mega-bank worth looking at right now. This particular bank is a low credit risk, and also has a lot of cash on hand, and there is a lot of room for it to expand internationally. So get those checkbooks out right now, bank stock buyers.

Difficult sector

It is not easy to invest in banks at the moment. I know you don’t want to hear this, but it really is the truth. It’s not like investing in a manufacturing company where you can predict what will happen during the next 10 years because it’s an easy to figure out revenue model. Banks are large, multifaceted and convoluted organizations. You should really only have them in your portfolio if you truly understand the ins and outs of the banking business. Otherwise, if you own them, you should have it on incredible authority that they are poised to make a consistent profit. That’s why a lot of people tend to often look to Warren Buffett and his investments as a good authority.

Not long after the financial crisis began, Berkshire Hathaway and Warren Buffett took out a few positions in some of the largest banks. One position they took out was in Bank of America, but this was more of a necessity to help out the ailing bank.

Warren Buffett also raised his position in Wells Fargo at this time, and is currently considered the best bank around right now. Wells Fargo is known to be a lot more conservative than its fellow competitors, such as J.P. Morgan Chase and Citigroup, and it has quite a bit of home mortgages currently on its books, which is excellent for the rebound in the housing market that is about to take place.

As a matter of fact, it looks like the housing market rebound has already begun at this point in time. It’s no secret that Warren Buffett’s Wells Fargo investment has already paid off big time for Berkshire Hathaway and the Oracle of Omaha. But there’s still one more bank that has quite a bit of room to go up in value in the foreseeable future, and Buffett is ready and waiting for his company to benefit when it does. Will you be waiting with him?

What a melon

As we review the latest 13 – F from Berkshire Hathaway, you will notice that Warren Buffett basically tripled his position in Bank of New York Mellon at this time. Bank of New York Mellon perfectly fits the investing style of Warren Buffett since it is a very conservative company, it has tendencies for cash printing, and the management in this business is very sound. There are a lot of appealing factors if you happen to be somebody looking for a cheap bank stock to purchase, and you are looking for exposure in the banking industry while keeping a very conservative approach.

The good thing for you conservative investors out there is that BNY is not one of these banks that make its money from banking practices that are morally wrong, as well as fly-by-night trades. About 75% of the revenue of this company comes from servicing fees that are recurring, and this is an excellent model which is obviously a perfect revenue model for a bank, or any company for that matter. BNY is actually the custodian of more than $27 trillion on a global level, and they are directly managing $1 trillion at the current time. I obviously do not need to point out that the servicing fees on $27 trillion are clearly going to be a really large chunk of change that is a fantastic recurring fee for Bank of New York Mellon.

The good old US of A

Another excellent thing that you might want to know about Bank of New York Mellon is that over 60% of their business takes place in the United States of America. But the company has a global presence that is expanding, and it is currently looking to earn more future revenue from other sections of the world as it expands. This is a really good opportunity for BNY because it has the ability to grow its business very fast since there are many different untapped markets all around the world just waiting for them. This is one of those rare cases of a stock that looks good for value investors, but the growth potential is also very strong as well.

Let’s stay on the topic of value for one second longer, because BNY trades pretty much like all of the other bank stocks are trading these days. As an investor in BNY, you only have to pay 0.78 times book value, which in my estimation is practically a fire sale. This is much less than 10 times its forward earnings, so it is only a little bit higher than Citigroup and J.P. Morgan as we speak, but the risk in this stock is considerably less than both of those mega-banks.

Since interest rates are increasingly low and basically staying there for the unforeseeable future, it obviously makes a great deal of sense to look into stocks that aren’t relying on the low interest rate to make its money. You want to look at banks that are focused on servicing the investments of its customer, which is exactly what BNY does. And they have drastically reduced their credit risk and interest rate, so they are able to offer their investors a really great business model of long-term revenue which is tough to pull off in the banking industry.

I want to remind you that it is not always really easy to invest in banks. You have to do a great deal of due diligence when evaluating a financial institution like this, and the only exception is with the local savings and loans. If you follow Warren Buffett’s lead by purchasing the stock because you feel it is an excellent choice, then you’d be in good hands since Bank of New York Mellon is very transparent with their current revenue streams, and they are also a exceedingly conservative business by nature. It obviously makes sense to follow the best in the world, and that is the exact opportunity that you have if you decide to follow Warren Buffett down this path.

There are a few similarities between the stocks that Jim Cramer likes and the companies that Warren Buffett currently owns. If you don’t know who Jim Cramer is, he is a host at CNBC and he has his own show revolved around the stock market called Mad Money. Although Jim is not technically allowed to trade for himself due to his contractual obligation, he does have a charitable trust which he regularly purchases stocks for as a way to benefit charity.

After reviewing Warren Buffett’s portfolio, and Jim Cramer’s charitable trust, we noticed that there are some stocks that they both happen to own. Let’s take a look at those stocks now so you can get a good idea where these two market giants meet in thinking.

The first stock that I want to mention is Wells Fargo and Company, which Warren Buffett has been a fan of for quite some time now. Berkshire Hathaway actually owns 400 million shares of this company since the end of June. This is about a 4% increase in the stocks that Berkshire Hathaway has of Wells Fargo since they owned it, and now it is also their second largest position only under Coke.

It also appears that Jim Cramer believes in Wells Fargo as well. His trust owns shares in this bank, and even though they have a relatively high valuation right now, they have a stable balance sheet and a proprietary brand that makes them an interesting purchase. Since they only have a trailing multiple earnings of 11, as well as their 2.6 dividend yield, we think that this is an excellent stock to buy and this is especially true when you compare it to similar banking conglomerates like Citigroup and J.P. Morgan Chase. Just to make it known, Cramer’s charitable trust also owns 2700 shares of J.P. Morgan Chase Bank and this position is actually larger than is Wells Fargo position.

Kraft Foods is also another stock that both Jim Cramer and Berkshire Hathaway own together. Just to let you know though, Berkshire Hathaway actually pared back their stake in Kraft, although they still own a total of 59 million shares. Jim Cramer’s trust also owns shares of this stock, but it is only a total of 2700. It is believed that Kraft is a good defensive position in the consumer goods sector, because you want to keep a diversified portfolio and this is definitely a good place to be. They have a 2.8% dividend yield, even though the stock appears to be price kind of high with a trailing price-to-earnings ratio of 21. The revenue and margins actually declined this recent quarter when compared to the same quarter last year.

The final common stock that Jim Cramer and Warren Buffett both own is CVS Caremark Corporation. Although Berkshire did cut their position in the stock during the second quarter, and they still own a total of 5.3 million shares. Jim Cramer’s trust owns 2300 shares of this company, and at this time it trades at 16 times trailing earnings, and will benefit greatly from the growth in its industry since there is a much greater demand for pharmacy services as baby boomers continue to get older.

If you want to actually copy some of the moves that Jim Cramer and Warren Buffett are making, then I recommend you choose Wells Fargo over the other choices. Although CVS is definitely a good buy, it makes more sense that Wells Fargo is actually the better choice.

The bank stock investors definitely have some choices that they are going to need to make since the largest banks in the nation have just reported their quarterly earnings.

Do these investors want to take a risk and chase the earnings rebound that is bound to happen at the major banks like Citigroup, Bank of America, and J.P. Morgan Chase Bank? There’s the potential for their shares rising well above single digit price-to-earnings multiples. Or better yet, would it be a better idea to invest in the safer premium priced lenders like U.S. Bancorp, BB&T, M&T Bank and Wells Fargo?

The one thing I can say for sure is that if you followed Warren Buffett’s lead, and invested in the traditional lenders such as Wells Fargo, then you would have implemented a very effective yet simple strategy. This industry is normally marked by high risk and earnings numbers that are very hard to understand.

To put it quite simply, Warren Buffett who is also known as the Oracle of Omaha, made the choice to invest his money in banks that were growing earnings through mortgage lending rebounding a bit, as well as low-cost share repurchases that are now going up in value.

On the flip side, Warren Buffett has hesitated when it comes to putting more money behind the players more oriented toward the capital markets such as J.P. Morgan, and he’s even backed off of the Wall Street investment banks such as Morgan Stanley and Goldman Sachs since they are at risk from the malaise on Wall Street, as well as the European debt crisis and new regulations that are coming into play each and every day.

Buffett has been sticking with the mid-teen price multiples of U.S. Bancorp, M&T bank, and Wells Fargo, as opposed to going after the single digit P/E ratios of some of the previous banks mentioned in the paragraph above.

Buffett chose to avoid making common stock bets in investing banks, which is why the investments Buffett made in the financial sector are outperforming those of his peers by a wide margin. The second quarter earnings of the bank stocks that he owns definitely reaffirmed that his way of investing is certainly the smart way to go. Wells Fargo and J.P. Morgan Chase Bank both started off this earnings season with much stronger than expected numbers, and Wells Fargo even outperformed expectations, which I learned according to data released by Bloomberg.

When you take a close look at Buffett’s portfolio of bank stocks, the outperformance is a marked improvement which you will certainly notice.

The top performers in the banking sector of the Standard & Poor’s 500 index, since earning season began are both M&T Bank and U.S. Bancorp. And the laggards in the banking sector are Bank of America, Goldman Sachs and Morgan Stanley.

That doesn’t mean that Buffett doesn’t have any investments in either Goldman Sachs or Bank of America. But he made preferred share investments which are extremely safe loans that will guarantee him a return on his investment. This has nothing to do with the regular trading of the common stock, and it’s a totally different type of investment opportunity which is paying off for Berkshire Hathaway.

It’s probably not a great idea to base your investment strategy off of the bank stock gains that have been taking place since the second week of July. But I’d like to point out that the performance of shares is actually reinforcing trends over the last few years which you also see reflected in earnings statements.

Buffett and company are continuing to hold their bank stocks because they believe in the investment in the US economy and recovery, but he did it wisely by smartly placing his money in banks like Wells Fargo (they are projected to be the most profitable bank in 2012 according to computations and analyst estimates from Bloomberg.) There are many other investors who are being lured into subpar investments by placing their money into the large financial banks that have troubled balance sheets and uneven earnings.

The Wall Street crash in 2008 hammered most of the bank stocks, but then in March 2009 the bottom of the stock market crash is where the bank shares began to triple in value for Bank of America and Citigroup, and Goldman Sachs and J.P. Morgan all doubled in value in a one-month period. There are lots of analysts and investors in the financial sector who believe that those mega gains could be duplicated once again in the very near future.

But the truth is that our nation’s biggest investment banks have totally underperformed, but that didn’t stop their shares from rising higher due to some deal making and misplaced optimism.

Between the months of March 2009 through May 2009, the nation’s biggest investment banks were actually the top performers at the time. But things have changed, and since that three-month period, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America have all lost more than 15% of their share value. All of these stocks are part of 10 bank stocks on the S&P 500, out of a total of 85 bank stocks in all, that have taken double-digit losses since May 2009. This information was obtained through Bloomberg data.

J.P. Morgan on the other hand has gained about 20% since that time. But Bloomberg data also shows us that the financial stock picks that Buffett made in M&T, U.S. Bancorp and Wells Fargo have all gained much better returns, and outperformed Chase by a wide margin during that same time.

If anything, I hope this market data will show investors that these large banks with volatile earnings aren’t necessarily the smart play, no matter what the big financial media reports show you. If you were to follow the less glamorous bank stocks that Warren Buffett chose, then you would’ve been much better off and gained some great exposure to consumer and mortgage lender growth.

The strategy is definitely confirmed by the earnings reports that have recently come out in the financial sector. The truth is that the strength in the lending gains are the reason why these earnings have propelled at Wells Fargo, and the reason why they outperformed expectations. The same holds true for J.P. Morgan.

When the second quarter earnings were released, it was learned that Wells Fargo beat the street because of a 35% increase in their quarterly profits. This number was bolstered by housing related activity and mortgage lending. J.P. Morgan, on the other hand, showed major growth in the area of new and existing homes, and they had a 30% year-over-year growth in the mortgage loan origination revenue department. The growth was also 14% sequentially which rose to $43.9 billion. But they showed a sharp drop in profits in the investment bank area.

The fact that J.P. Morgan had a major boost in their home lending earnings was actually a major bright spot throughout the entire second quarter. This was an earnings season that showed a sharp drop in revenue from the investment banks, and the $4.4 billion “London Whale” trading loss. Traditional revenues in investment banking fell a great deal on Wall Street, and in Morgan Stanley’s case they dropped about 50%, and the large bank earnings were unfortunately clouded by a lot of accounting items that only represent a onetime situation. There’s also the possibility that the rate fixing scandal going on at Barclays is going to spread and that will negatively affect the large banking conglomerates.

“With roughly 80% of the banking industry by assets having reported 2Q12 results, the overarching theme of earnings has been continued impressive mortgage banking revenues, surprising [net interest margin] resilience, and modest loan growth,” said Paul Miller who is an FBR Capital Markets analyst in a July 23 earnings wrap. “Given a sustained low rate environment, government mortgage programs, and constrained market capacity, we believe that mortgage banking will continue to be a dominant earnings driver through the end of 2012,” he added.

Banks such as Wells Fargo, Fifth Third, PNC Financial, J.P. Morgan and U.S. Bancorp, who all have large mortgage banking platforms, will all continue to be supported by home buying activity and refinancing, mentioned Miller.

As a matter of fact, the recent earnings numbers actually reinforce some of the things that Warren Buffett forecasted about the housing market in an interview that he gave on CNBC on July 12. He mentions that our economic growth in this country has basically stopped dead in its tracks, but he’s noticing that there is a pickup in the residential housing area, which was a comment that he made in regards to bank earnings.

“The general economy in the United States has been more or less flat, and so the growth has tempered down. But the residential housing, we’re seeing a pickup. It’s noticeable. It’s from a very low base,” Buffett said, who stated that he recognizes that he sort of flip-flopped with his optimism when he was very bullish on this topic of housing in 2011.

There are lots of housing sector analysts and banks that also agree with him. The analysts from Goldman Sachs actually raised their earnings estimates on two of the homebuilders which included MDC Holdings and KB Home, because the analyst believes in a “strong US housing recovery.”

If you are a stock investor that trusts in the fundamentals, you should also consider following Buffett. According to the results of the stress test of the Federal Reserve in March, Buffett led the way with his investments in such areas as U.S. Bancorp and Wells Fargo, and this also pushed forward some share buyback plans and dividend boosts. The Wells Fargo dividend was raised by 83%, and this was followed by an accelerated buyback program which began in the year 2011. U.S. Bancorp, on the other hand, also boosted their dividend by a total of 56%, and they even plan to buy back $3.3 billion worth of shares.

There aren’t many Americans who are aware of this fact, but the truth is that Berkshire Hathaway has been steadily and quietly putting themselves in a position where they will play an important role in the mortgage market that Bank of America, and others, are currently shying away from at this time.

Did you know that Berkshire Hathaway is actually in a bidding war with Nationstar Mortgage Holdings? They are bidding to receive the assets of ResCap, which is actually the fifth-largest mortgage servicer in the nation, behind such major financial institutions as Citigroup, J.P. Morgan Chase Bank, Bank of America and Wells Fargo.

Whoever wins this bid is going to instantly become a large player in the mortgage servicing industry, and they will have the ability to collect the debts of 2.4 million home loans once this deal is complete. The significance of the move they’re trying to make is that many of the other larger banks, with the one exception being Wells Fargo, is that they are all choosing to pull out of this facet of the financial services industry. In particular, Bank of America has been regularly selling off the rights to their mortgage servicing business.

This week is very important for the United States housing market, and we are looking for a quiet shift in this industry as new details come about. How is this going to happen? Ocwen Financial Corp., which happens to be the 13th largest mortgage servicer, and Fortress Investment Group, the company that owns a Nationstar, are going to be reporting the results of their second quarter earnings this Thursday in the morning.

You can definitely expect that Fortress is going to be asked plenty of questions about Warren Buffett’s battle for ResCap, and I wouldn’t be surprised if Ocwen management also gets questions about the specific topic, since they have expressed their own interest in purchasing the assets of ResCap.

Another potential area you might want to find out more details is with Bank of America selling off their mortgage servicing rights. They have sold the rights to over 15,000 loans so far, even though the United States Justice Department is currently reviewing them which is holding up the sales. This is according to the CFO of Bank of America, Bruce Thompson, on July 18 when his company reported their earnings.

When asked about the delay in loan sales, Thomas predicted that it would last between one to two quarters. What would really be interesting is finding out what Fortress and Ocwen have to say in regards to purchasing MSRs from Bank of America.