Warren Buffett owned about 10% each of Delta, Southwest Airlines, American and a little bit less of United. He wound up with a bit over 10% of Delta – his biggest airline position – by accident when he was buying as Delta was buying back shares.
He bought more Delta stock as recently as two months ago, even though his airline positions never worked well and are investments he himself had warned against. Buffett has now unwinded them all and walked away from the industry.
The Berkshire Hathaway chairman once famously laid out just how bad a business the airline industry is for investors,
If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money.
But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.
You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success.
Copyright: rido / 123RF Stock Photo
However Buffett got back into airline investing three years ago, not quite convinced that major carriers had become ‘high quality industrials’ just that the business had become better than it used to be. Berkshire Hathaway promptly lost over a billion dollars on these investments.
A year ago there were rumors he was going to buy Southwest Airlines in its entirety and that drove up the airline’s share price.
However Buffett now sees all of the airlines as ‘chewing up money’ in the future and that he doesn’t see demand recovering for several years, meaning that airlines are too large with too many planes. Even at today’s depressed share prices he didn’t see his positions as sound investments.
If Buffett didn’t at least buy in Berkshire stock like a madman on March 23, when it reached .916 of book value (much of it in cash) he never will. If someone is handing you free money, you take it.
Dude’s paralyzed. Game over.
@ toomanynooks — Who’s game is over? Warren Buffet is smarter about investing than anyone ever. The fact that he hasn’t bought much of anything lately because it is overpriced should tell you where things are headed, and it ain’t pretty.
@Gene:
I have here $1,000,000,000. I’ll take $916,000,000 for it. Deal?
Yeah, it’s a bit more complicated than that, like if you think tomorrow it will be $900,000,000, but not much.
Check Berkshire’s 10-year performance vs. the Vanguard Total Stock Market. Go ahead. Poor. He’s resting on his 1980s and 1990s laurels, which were impressive.
He’s so hemmed in by his reputation, he’s just gonna sit there and pile up cash.
I think the mere fact that he dumped all his airline stock is a harbinger of owning airline stock for the near future. Conventional wisdom the airlines have a long slow slog out of the hole they’re in. The good news is that many of them are using this down time to rid themselves of their older less efficient aircraft thats a good thing especially AA / UA with all their ghetto planes. What will be interesting is how they deal with density on their planes face mask along don’t get it. The new planes do have far better air filtration systems thats a good thing for passengers.
There will be plenty to write about
Gary, if demand continues to be low as it has, realistically are airlines around the world going to do with planes sitting on the ground for a couple years? Doesn’t that mean KO for Boeing and Airbus since there are going to be so many newer planes just sitting around? Or will the piece them out for parts or put them in some type or long term storage? I don’t think anyone plans for storing this many planes at once.
At what price did he sell
@Gene
Exactly! Buffet has been saying the market is overpriced for about a year. Why? Because, companies were just buying back stock to create demand and inflate earnings. It is all a sham. Most of the companies took out loans (because interest rates are so low) to buy back that stock. Last I looked the Fortune 500 has $10 trillion of loans for buying back stocks.
@toomanybooks
Cash is king right now! Buffet will sit on the sides waiting for opportunities. Just as he has for the last 50 years. Buffet stated, “You can bet on America, but you need to be careful how you bet. Simply because the markets can do anything”. Many financial experts are saying that this market will correct again. Maybe then Buffet will buy back his own companies’ stock. I follow Buffet and many others and there is a trend among their opinions. I moved 75% of my holdings to bonds in Dec. 2019. For 2 months I thought I did that too early. But I only had a small loss for the first quarter. Most people lost over 20% of their holdings.
Berkshire Hathaway is not normal company. It is a huge conglomerate. Which is impossible to double in size and earnings. Matter of fact, Buffet himself recommends Vanguard S&P 500 as a better investment because it is more diversified.
Too many books, hmm. Maybe you should read other sources for current investment advice. Because it is not in books.
Buffet is on strange dude:
Billionaire investor Warren Buffett said he’s sworn off investing in airline stocks since his $358-million (U.S.) “mistake” in US Airways Group Inc.
“Now if I get the urge to invest in airlines, I call an 800 number, and I say: ‘Hello, my name is Warren, and I’m an air-o-holic,’ ” he said.
Mr. Buffett told journalists aboard a London-to-Paris flight on Tuesday that in the last 20 years, 130 U.S. airlines have gone broke. “It’s unbelievable,” he said, offering to dig out a list of the failed companies he keeps back in his office in Omaha, Neb., to show doubters.
“The airline business from the time of Wilbur and Orville Wright through 1991 made zero money, net,” he said. “If capitalists had been present at Kitty Hawk when the Wright brothers’ plane first took off, they should have shot it down.”
— March 29, 2001
Yes. That’s the 2001 that took place nineteen years ago
@toomanybooks: Even assuming, arguendo, that Berkshire stock was trading at 91.6% of NAV, it would be an inappropriate allocation of capital to buy Berkshire as you can’t liquidate the holdings for 100 cts /$1
I’m not sure where the 91.6% number came from , but Berkshire has a lot of privately owned businesses, not just public holdings.
One has to wonder if Bob Crandall was right when he said the following:
“I’ve never invested in any airline. I’m an airline manager. I don’t invest in airlines. And I always said to the employees of American, ‘this is not an appropriate investment. It’s a great place to work and it’s a great company that does important work. But airlines are not an investment.” “A lot of people came into the airline business after deregulation,” he has noted, adding that “most of them promptly exited, minus their money.”
Unlike some, Buffett realizes the worse may still be ahead of us so he is watching and waiting. Maybe a mistake, maybe not. No one will know until a few years down the road.
Buffett is a guy who likes to own stable, profitable companies in oligopolistic industries. He does not invest in “risky” stocks — even though many such stocks double or triple (or go broke). Due to the black swan event of COVID-19, the airline went from stable and profitable to risky. It’s not his game. That’s why he sold. Buffett has not done well with airline stocks. In this cycle, he bought after “all the money had been made,” and had losses before the pandemic started. I actually think he’s mostly a victim of bad luck with these investments. Most everyone who invests thinks they’re a genius, but luck is probably more important than skill in most investments. “Geniuses” like Buffett still strike out a large percentage of the time. Pandemics don’t help that batting average.
This pandemic is most certainly not a black swan. Learn what a black swan event entails before bandying about the term.
https://www.newyorker.com/news/daily-comment/the-pandemic-isnt-a-black-swan-but-a-portent-of-a-more-fragile-global-system