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TheStreet Open House

Warren Buffett Shuns Investment Banks, Embraces Wells Fargo

Stocks in this article: WFCUSBJPMBACCGSMS

NEW YORK ( TheStreet) -- Warren Buffett likes bank stocks, just not investment banks. And for good reason.

By avoiding common stock bets on investment banks like JPMorgan Chase (JPM), Goldman Sachs (GS), Citigroup (C) and Morgan Stanley (MS) the "Oracle of Omaha's" financial sector share investments have greatly outperformed most other investors.

Warren Buffett

Of course Buffett made preferred share investments in Goldman and Bank of America (BAC) during the height of the crisis, but these were essentially super-safe loans that guaranteed a return and did not reflect his common stock plays.

In fact, as Buffett continued to hold banks stocks as a key part of a U.S. economic recovery investment, the value investing guru has kept his chips smartly behind Wells Fargo (WFC) -- which is projected to end 2012 as America's most profitable bank -- even if the battered share prices, titanic balance sheets and boom and bust earnings of money center giants lure some of the sectors smartest investors into sub-par investments.

Although Buffett's likely to have about the same insight as the 'Average Joe' when it comes to a multi-billion dollar 'London Whale' trading loss at JPMorgan, investment bank ratings downgrades and a market manipulation probe that may start with Barclays (BCS) and spread across Wall Street, his continued investment in the stability of traditional lenders like Wells Fargo, US Bancorp (USB) and M&T Bank (MTB), and an investment in credit card giants American Express (AXP), Visa (V) and MasterCard (MA) have greatly outperformed mega-bank stocks.

>>View Warren Buffett's Portfolio

Since the 2008 Wall Street crash pummeled most bank stocks and a March 2009 stock bottom led to a tripling of the shares of megabanks like Citigroup and Bank of America, and a doubling of JPMorgan and Goldman Sachs within a span of just over a month, many financial sector investors and analysts forecast that those gains could be replicated.

Instead, the nation's largest investment banks have underperformed, even as their shares gyrated upwards on misplaced optimism of a durable trading or deal making surge.

From March 2009 to May 2009, the largest investment banks were among the financial sector's top performers, driving many investors including hedge fund titans John Paulson and David Tepper of Appaloosa Management strongly into the stocks of Citi and Bank of America. Since then, Morgan Stanley, Bank of America, Goldman Sachs and Citigroup shares have all lost over 15% -- and are among 10 S&P 500 bank stocks out of 85 in total that have lost double digits since May 2009, according to Bloomberg data.

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