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Margaret Moran
Margaret Moran
Articles (208) 

Warren Buffett: What You Know Can Change

At Berkshire’s 2020 meeting, the guru took a cautious stance toward turbulent markets

May 07, 2020 | About:

Investors had some forewarning that Warren Buffett (Trades, Portfolio) might be selling out of Berkshire Hathaway’s (NYSE:BRK.A) (BRK.B) airline holdings when he reduced the firm’s positions in Delta Air Lines (NYSE:DAL) and Southwest Airlines (NYSE:LUV) in April. During Berkshire’s 2020 annual meeting of shareholders on May 2, Buffett confirmed that he had made the call to completely sell out of the firm’s four major airline holdings.

“The world has changed for the airlines, and I don’t know how it’s changed…” Buffett said. “There are things on the lower levels of probabilities that happen sometimes, and it happened to the airlines.”

Below is a chart of the stock prices for Berkshire’s four airline investments: Delta, Southwest, American Airlines (NASDAQ:AAL) and United Airline Holdings (NASDAQ:UAL). Year to date, the share prices of these stocks are down 64%, 53%, 67% and 73% respectively.


Though Buffett said he hoped to see the airlines recover soon, he cited the “black swan” event of Covid-19 and the subsequent economic shutdowns as triggers for making the future of the airlines unpredictable.

Invest in what you know

Does Buffett’s dumping of the airlines mean he thinks that all investors should follow suit?

Not necessarily. In fact, Buffett made sure to emphasize this when discussing airline stocks at the meeting, saying, “We were not disappointed at all in the businesses that were being run, and the management.” One of the reasons why Buffett typically avoids talking about Berkshire’s trades during the shareholder meetings is because he does not want investors to think of such comments as investing advice.

In the past, Buffett has held that investors should only invest in businesses that they can understand. In fact, “invest in what you know” is one of the most famous quotes from the value investor.

This differs for everyone, as each investor has their own types of businesses that they focus on and are better able to analyze. “You should do something that you understand yourself, if you don’t understand it yourself you’re gonna be affected by the next person you talk to,” Buffett said at the 2020 meeting.

What you understand can change

What you understand can also change, which is why Buffett sold the airlines for a total loss of approximately $4 billion according to GuruFocus calculations. This number takes all holding history into consideration, including previously realized gains and losses, and assumes that he sold the stocks at the average prices for April.

If you no longer feel confident in your ability to understand a business and its future cash flows, holding on to your shares is speculating, not investing. This kind of shift most often occurs due not to problems in the underlying business in relation to competitors, but instead due to changes in the environment in which the business is able to operate.

Black swan events, which are largely unanticipated events with an extremely low probability of happening, can rapidly change the conditions for one or more business sectors on the rare occasion that they do occur. Covid-19 is just such an event. However, slower shifts can also change the game, such as the events leading up to the subprime mortgage crisis in 2008.

Other potential events that could reduce an investor’s confidence in their ability to analyze a company’s prospects include new laws and regulations, reaching the end of a growth phase (i.e., a fast-grower approaching market saturation) and new management that promises to make significant changes.

Thus, Buffett does not take “profit” or “loss” into consideration when analyzing what the future of a business could look like. There is simply too much risk of downside and opportunity loss involved if you forge ahead blindly, and no amount of wishing you could have made a profit will change that.

Individual vs. institutional investing

The foundation of value investing is buying low and selling high. Similarly, the foundation of growth investing is buying with the expectation that the stock and the underlying business will eventually be worth more than they were when you invested.

However, this does not mean that all investments are suitable for everyone. In addition to everyone having their own types of investments that they understand, suitable investments can also differ based on how much money you are handling and whether you are investing just your money or other people’s money.

During the 2020 meeting, Buffett said he was not willing to risk the permanent impairment of shareholder capital, which other firms are often willing to do in order to invest in more opportunities. This cautious stance is especially relevant for Berkshire Hathaway as investments make up only a portion of the conglomerate’s activities. The company has its other businesses to consider, including Geico, Berkshire Hathaway Energy and See’s Candies.

“[Berkshire’s cash position] isn’t that huge when I look at worst-case possibilities," Buffett said. "I would say that there are things that I think are quite impossible, quite improbable, and I hope they don’t happen, but that doesn’t mean they won’t happen.”

Compared to conglomerates, individual investors and even fund managers have access to a different range of risk-reward scenarios, as they will not have to store capital to keep cash-burning businesses afloat in hard times.

Another important difference between individuals and institutions is that when it comes to investing, the larger firms must find opportunities with higher market caps in order to allocate a significant enough portion of capital.

For example, in order for a Berkshire Hathaway investment to move the needle, it would need to be worth tens of billions of dollars. "You could come to me on Monday morning with something that involved $30 billion or $40 billion or $50 billion. And if we really liked what we were seeing, we would do it,” Buffett said at the 2020 meeting in response to a question about what he was planning to do with Berkshire’s cash pile, which has increased to over $130 billion as of the end of the first quarter.


Meanwhile, individual investors only need to consider business downsides if they own businesses themselves.

Having a smaller amount of capital also means that small-cap opportunities are available. However, small caps often trade higher risk of business failure for higher upside, so they may require more digging for information in order to leave the arena of speculation.


Buffett’s tone during Berkshire’s 2020 shareholder meeting was cautious due to the futures of several business sectors becoming unpredictable from his perspective. Investors eager to hear any hints about potential large acquisitions did not receive any such announcements, though the Oracle of Omaha did indicate willingness to invest if an attractive enough opportunity came up.

However, the investing guru emphasized in various ways that all investors face different circumstances. What makes sense for Berkshire Hathaway will not make sense for everyone, and while the U.S. stock market will almost certainly be higher 20 or 30 years from now, short-term volatility could be with us for longer than just the past couple of months.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research or consult registered investment advisors before taking action in the stock market.

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