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Stepan Lavrouk
Stepan Lavrouk
Articles (626) 

Warren Buffett Sold Airlines in April

The Oracle of Omaha doesn't always buy and hold

May 05, 2020 | About:

Ever since global stock markets crashed in March, there has been a lot of speculation over what Warren Buffett (Trades, Portfolio) is doing. At the Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) annual shareholder meeting on Saturday, which was livestreamed, he disclosed that the conglomerate holds almost $125 billion in cash and cash equivalents. Furthermore, rather than "buying the dip," Berkshire actually sold stock in a number of U.S. airlines - though some small purchases were made in the first quarter of 2020. He also discussed what he had instead chosen to do with his huge reserve of cash. Here’s what investors can learn from his comments.

Cut your losers early

In the month of April, Berkshire was a net seller of stocks, dumping $6 billion worth of equities into a declining market. Buffett stressed that this was not a bet on whether the market was about to continue to go down - the airline sale occurred because he decided he made a mistake in evaluating those companies:

“It was a probability-weighted decision when we bought that we were getting an attractive amount for our money [by investing in airlines]. We probably paid between $7 billion and $8 billion to own 10% of the four large airlines, and we felt that for that, we were getting a billion dollars roughly of earnings, and we felt that number was more likely to go up than down. And it turns out that I was wrong about that business because of something that wasn’t in any way the fault of the CEOs.”

I think that a lot of investors can learn from Buffett’s willingness to admit his mistakes and cut his losses. There is this misguided notion that long-term investors should never sell anything, and that “time in the market is better than timing the market.” Now, while it is definitely true that most investors would benefit from adopting a longer-term horizon, that doesn’t mean you should never sell anything. In fact, Berkshire frequently sells its equity holdings, even when the market isn’t crashing.

Two traits that almost all successful investors have in common is that they let their winners run and they cut their losses early. This doesn’t mean you should start selling stocks just because everyone around you is liquidating - quite the opposite, in fact. But if something happens that fundamentally alters your investment thesis on a company, then you need to be able to put your hands up and say, “I was wrong on this one, circumstances changed and this is no longer a good investment.”

There’s no shame in being wrong if your logic was sound at the time you made your decision. Most people don’t like to admit defeat. They are more concerned with looking smart than they are with making money. Buffett doesn’t have this problem - he’ll happily cut his losses early and move on to the next opportunity. You should have the same mindset.

Disclosure: The author owns no stocks mentioned.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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