Was Warren Buffett (Trades, Portfolio) right to sell his airline holdings? It appears not if the recent deluge of articles on the topic is to be believed.
In recent days, a large number of analyses have been published criticizing Buffett's decision to sell after these stocks jumped in value. Even President Donald Trump weighed in on the issue. In a press briefing a few days ago, he said:
"Warren Buffett (Trades, Portfolio) sold airlines a little while ago. He's been right his whole life, but sometimes even someone like Warren Buffett (Trades, Portfolio) — I have a lot of respect for him — they make mistakes. They should have kept the airline stocks, because the airline stocks went through the roof today."
Buffett and airlines
The answer to the question isn't simple. In hindsight, it looks as if Buffett might have made a mistake.
However, it's easy to say that based on what we know right now. The situation could change entirely over the next few days.
Buffett's actions are an interesting case study and require further analysis.
Let's concentrate on what we know, rather than what we don't. Buffett started buying airlines several years ago because he thought their business model had become more stable and pricing more rational. He kept buying as these companies returned billions to investors with dividends and buybacks. Even at the beginning of the coronavirus crisis, Buffett was still buying on weakness. He even said that he thought the outlook for airlines was attractive over the long term as the virus would go away at some point, and airline demand would recover.
But Buffett quickly changed his mind at the beginning of April. Was he spooked? I do not think so. If you were to take an outside look at the airline sector at the beginning of April, you would have seen a range of companies with high costs bases, no revenue and no clarity on when they would start flying again.
To some extent, even though carriers are beginning to resume flights, these headwinds still exist.
Time to buy an airline?
Buffett has always said that when you're analyzing a stock, you should view it as if you were analyzing a whole business to buy. So the question is, would you buy an airline right now?
The biggest issue airlines have is cost. Carriers can ground their fleets, but they can't eliminate all expenses. There are storage fees to pay and engineers to make sure the planes are ready to go when flights resume. That's without taking into account any other charges. Many of these can't be eliminated entirely. Airlines have had to grapple with the problem of no money coming in, and lots of money going out.
Would these investments have recovered if the government and Federal Reserve hadn't stepped in to save them? It's unlikely.
In hindsight, selling these investments looks like a mistake because they were bailed out, but owning a stock just because you think it might be bailed out isn't investing. That is gambling. Buffett does not gamble on investments.
So, in my view, the answer to the question posed is simple.
Buffett did make the right decision to sell his airline holdings based on the information he had at the time.
In hindsight, it looks like a bad decision, but it could have gone either way. At the time, the future of these businesses was uncertain, and he wanted to preserve capital rather than gamble on an unknown outcome. That seems like the right course of action to me.
Read more here:
- The Best Reason to Sell a Stock According to Warren Buffett
- Avoid Melting Ice Cubes and Value Traps​
- Buffett, Tobacco Stocks and RJR Nabisco
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