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By recently looking at the S&P 500 in regards to largest market capitalization, we learned that Berkshire Hathaway has now earned the number three spot and has taken over for Google Inc., according to information presented by The Online Investor.

If you are an investor, it’s really important to keep your eye on market capitalization for a whole host of reasons. But the biggest reason of all is that it truly allows you to compare a company’s stock to the value credited by the stock market.

New investors often make a simple mistake. They’ll see one company’s stock trading at $20, and then another company’s stock trading at $10, and think that the company whose stock trades for $20 is worth twice as much as the other business. That is an incorrect comparison. In order for it to work, you must know how many shares exist for each company.

But when you factor in the share counts and compare market capitalization, this provides a true comparison and gives you the ability to get a real-world value for both stocks.

Berkshire Hathaway’s current market capitalization is now $260.10 billion. Google’s market capitalization is only $255.40 billion. But, the price of Berkshire Hathaway Class A shares cost over $150,000 more per share than Google. That doesn’t mean the company is worth 150,000 times more than Google.

Market capitalization is also important because it shows where a company is placed in terms of its size when comparing it to other businesses in its peer group. An example is comparing a standard pickup truck to another standard pickup truck. It wouldn’t be fair to compare a standard pickup truck to a compact car.

This can also have an immediate impact on which ETFs and mutual funds are willing to purchase the stock.

As an example, some mutual funds specifically only invest in small cap stocks, so that is where they focus. The S&P MidCap index is also another example. In essence, this fund takes the 100 biggest companies on the S&P 500 and it removes them. It only focuses on the up-and-coming smaller 400 companies.

So the market capitalization of a company is very important, and this is especially true in relation to other businesses. That’s why it’s very valuable to rank companies this way on a daily basis.

Sometimes when you read Berkshire Hathaway’s proxy it’s always a pretty good laugh.

It’s a little bit outrageous that one of the richest men in the world, Warren Buffett, only earns a salary of $100,000 for his services to Berkshire Hathaway. Then he turns around and immediately cuts a check for $50,000 to pay back Berkshire for “minor items such as postage or phone calls that are personal.”

But the funniest number of all that I recently read is board member Bill Gates was paid $1800 for his services to the company just last year.

To give a comparison, the average board member fees for companies that reside on the S&P 500 was roughly around $241,000 in the year 2011. I learned this through compensation experts Equilar. So Gates $1800 check is quite small.

Earlier this month, Forbes estimated that Bill Gates is currently worth around $67 billion. What does that mean for his Berkshire Hathaway income… It’s currently worth around 0.000003% of his overall net worth.

Let’s put it another way…

The net worth of the average American family is around $80,000. So Bill Gates $1800 is roughly the equivalent of 2/10 of a cent for the average American family.

Of course there are other reasons for Bill Gates to sit on the board of Berkshire Hathaway. He runs a charity with his wife known as the Bill and Melinda Gates foundation, which will get billions of dollars from Buffett in the form of Berkshire Hathaway shares. Plus, Warren Buffett and Bill Gates are longtime friends.

As I’m sure you can imagine, Gates doesn’t do this for the money. He has probably lost more than $1800 in all of his couch cushions.

Back on October 16, 2008, CEO, chairman and value investor Warren Buffett wrote an op-ed piece that was published in the New York Times. The piece was titled “Buy American. I am.”

This op-ed piece first appeared in print on October 17 of the same year, right during the height of the financial crisis. Stock prices were swinging wildly from day to day, and the market was plummeting.

As a matter of fact, on the day Warren Buffett wrote the piece, on October 16, the S&P 500 swung 4% from the lowest value to the highest value in that single day. The S&P opened at 909, dropped to 865 and then surged in value to 947 before it closed at 946. The Dow Jones had a very similar volatile day. At its height, it traded at 9013 and then closed at 8979. That is a 5% swing during the day.

Even in the middle of all of the noise and scary volatility, Warren Buffett urged people to stay calm.

He wrote:

“The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So… I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100% in United States equities.

Why?

A simple rule dictates my buying: be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But the most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower in a month – or a year – from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”

Warren Buffett predicted his buying movement a little bit too early. The stock markets actually hit their bottom on March 9, 2009.

But if you paid attention to the market close on the date of his op-ed piece, which was October 17, 2008, to yesterday’s close on February 12, 2013, and you followed his advice and bought the S&P 500 and the Dow, you would currently be up 61.6% in the S&P and 58.4% in the Dow Jones.

Did you take Warren Buffett’s advice and buy as many stocks as you could during those dark days in 2008 and 2009?

Did you learn anything about your own risk tolerance during the Great Recession?

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.