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Warren Buffett has 45% of his stock portfolio in bank stocks. Why? The simple answer is because he believes interest rates will go up. Interest rates are cyclical, and have been decreasing since 1980. Low interest rates have helped prop up the stock market in recent years, while adversely affecting bank stocks, who make more money when interest rates are high.

With interest rates at 0%, it is very likely that rates will increase sometime in the near future. It may not happen immediately, but in the next few years interest rates should start to rise.

There is also an inverse relationship between interest rates and stocks. When interest rates go down, stocks are valued more highly because future cash flows are discounted at a lower rate. This leads to more investors buying stocks and driving up stock prices.

However bank stocks go up when interest rates go up. So you can think of bank stocks like a hedge against interest rates, since they move together. This is why I have a large position in a financial stock to take advantage of interest rates going up.

So this is typical Warren Buffett. Buying out of favor stocks when no one is interested. If interest rates ever do rise, bank stocks will see an increase in demand again and Buffett will make tons of money.


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