Warren Buffett might still be right about the airlines

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by bestrongbelieve

“In the short run, the market is a voting machine, but, in the long run, it is a weighing machine” -Benjamin Graham

Warren Buffett has taken some heat recently over his decision to sell all of his airline stocks near their lowest point. Amid investor optimism for the return of “normal” travel behavior, airline stock prices took flight, so to speak, as a primary beneficiary of this exuberance. This has every investor with a Robinhood account sitting on his couch thinking he is smarter than perhaps the greatest investor of our time. But is he?

  • Warren Buffett is not a short-term swing trader, he is a long-term, buy-and-hold investor. He looks at the prospects of a company 20 to 30 years down the road, not 2-3 months
  • Airlines represented a significant, but relatively small portion of Berkshire Hathaway’s portfolio. Taking a loss on an industry that is in turmoil for the chance to redeploy in another industry with clearer skies ahead is more in line with the investing philosophy that made him a success
  • Armchair investors think to themselves, “Well, people won’t stop flying”, I’ll buy AAL, UAL, and DAL. While that is certainly true in the broad sense, think about the practical sense. Airlines need to squeeze every dollar out of every flight to remain profitable. Under the “new normal”, not only might the incredibly important Middle Seat be in jeopardy, but the ridiculously profitable Business Class seat is also going to see massive declines as more and more business is conducted remotely.
  • With cash burn rates in the double-digit millions of dollars PER DAY, many major U.S. airlines are only in business due to federal government bailout money — one of the conditions of which was that they keep paying their employees that are not doing much flying (or revenue generation) these days.
  • While it is a near certainty that “people won’t stop flying”, there is no certainty about who will be doing the flying. When the bailout money is gone, the cash is depleted, and the revenues are a fraction of where they need to be, a company goes bankrupt. It is entirely possible that one or even two of the major U.S. airline carriers never get their head above water again. Which ones? (*Casually glances at American and United*) I’m not sure, BUT, what I am sure about, is that Warren Buffett has access to way more information about the companies he invests in than you or me.
  • Last Thursday, while AAL stock was almost doubling, 14 of its top officers VOLUNTARILY took buyouts to leave the company. Now, ask yourself — why would anyone in their right mind in a leadership role at a prominent U.S. company with a huge salary and comfy corner office voluntarily leave that company and deny themselves the personal glory of being part of a turnaround story?

My advice: Take your profits now and buy yourself something nice — like stock in a company that actually has massive future growth and profit potential. And do not think that you are smarter than Warren Buffett.

Finally, they are a few years old, but these nifty infographics offer a fun insight into what makes the Oracle of Omaha tick:

Part One: The Early Years

Part Two: Inside Buffett’s Brain

Part Three: The Warren Buffett Empire

Part Four: Buffett’s Biggest Wins and Fails

Part Five: Wisdom from The Oracle

 

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