Last weekend, Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) held Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) annual shareholder meeting.
During the meeting, the duo made many interesting comments, and soon after, we learned that Greg Abel would take over managing the group after Buffett steps down. Buffett also providing some fascinating insight regarding the sale of Berkshire's airline holdings last year.
Berkshire's short airline adventure
Buffett started buying a selection of airline holdings for Berkshire's massive equity portfolio in 2016. After avoiding the sector for decades, he decided that the fundamentals had changed so significantly, the airline industry was no longer the graveyard for investors it once was.
After starting to buy, Buffett quickly built up his holdings, taking Berkshire's ownership to more than 10% in a few key names.
When the Coronavirus pandemic started to spread around the world in the first quarter of 2020, Buffett reacted as many might have predicted. He began to buy more airline shares. In an interview with Yahoo Finance editor-in-chief Andy Serwer at the time, Buffett remarked, "I won't be selling airline stocks."
But that changed a few weeks later. At the beginning of April, ownership filings showed Berkshire had started to dispose of its airline holdings. Then, at the conglomerate's annual meeting, Buffett revealed that he had dumped all of the holdings. He said at the time that airlines had been hurt by a shock "far beyond their control."
The Oracle of Omaha added that it would be "a tough decision" to decide whether to sustain billions of dollars in operating losses at the airlines, "when you don't know how long it's going to happen or occur."
Since then, airline stocks have recovered rapidly. They've been helped, in part, by a substantial government bailout and a faster than expected recovery in aviation traffic. For example, shares in Delta (DAL, Financial) have jumped more than 100% from early April 2020 levels.
A year after revealing that he'd changed his mind on airlines, Buffett spoke about the decision once again at last weekend's annual meeting. The Oracle of Omaha pointed out that airlines had received substantial government help in the past 12 months, but this help might not have arrived if Berkshire had continued to be a significant investor.
I think this is a fascinating point. This time last year, Buffett's conglomerate had over $100 billion in cash on its balance sheet. One could have made a strong argument that this cash should have been used to bail out the airlines rather than relying on taxpayer-funded programs.
Of course, it's impossible to say what might have happened. However, what is clear is that by selling off the airline holdings, Buffett was able to remove a large chunk of uncertainty from his portfolio. After all, why would any investor want to own a large piece of a business with such as uncertain future?
Selling due to uncertainty
It's very easy to look back now and opine that Buffett made a mistake. However, if it was that easy, anyone could be a successful investor. The thing is, Buffett had to act in April 2020 on limited information, and he had to make a decision that would lead to a profitable outcome for himself and his investors.
So, rather than gambling with Berkshire's billions, he decided to get out and keep the cash on the sidelines. From this perspective, Buffett's comments over the weekend about bailouts are pretty irrelevant, in my opinion.
Investors should never hope for the kindness of strangers to come and bail them out. Instead, we have to make decisions based on the available information. Some of these decisions may turn out to be incorrect in the long run, but we never know what might have been. Unfortunately, that's just part of investing. An even worse error would be to hold onto a bad investment and hope for the best.
Disclosure: The author owns no share mentioned.
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