Last weekend, Warren Buffett made a shocking announcement. The ‘Oracle of Omaha’ told the world he’d been selling stocks during the first quarter of 2020. This announcement caught many investors by surprise. Buffett has built his reputation, and fortune, on buying stocks when everyone else is selling.
So, why did he decide to take this course of action, and should other investors follow his lead?
Buffett starts to sell
According to the limited information we have, Buffett sold several billion dollars of stock in the opening quarter of 2020. It appears he hasn’t reinvested the bulk of the proceeds.
Buffett was selling airline stocks in particular. He later said the reason why he decided to sell airline stocks is that the outlook for the sector has changed dramatically. Despite booking losses of several billion dollars on the positions, he decided to sell rather than face years of uncertainty. This approach makes a lot of sense.
Whenever he evaluates a business, Buffett always bases his analysis on company cash flows. If he can’t predict the cash flows for the foreseeable future, he doesn’t invest.
That seems to be what’s happened here. As the outlook for airline stocks has deteriorated, cash flow forecasts have become impossible. As such, it isn’t that surprising Buffett sold the airline holdings.
Not being greedy
As Warren Buffett sold his airline investments, he also avoided making any other deals. This is surprising. The investor is usually in a rush to buy stocks when they are on sale. The fact that he didn’t, suggests he’s worried about the outlook for companies.
How should investors react to this news? Buffett provided the answer himself last weekend. He noted that while the outlook for some companies has deteriorated, over the long term, the global economy should recover from its current setback.
Indeed, over the past few decades, the global economy has suffered many significant difficulties. However, the market has always recovered from these setbacks over the long run. There’s no reason to believe it won’t see the same performance this time around.
Buffett recommended that investors should buy a low-cost market tracker fund to profit from this trend. A low-cost FTSE 100 or FTSE 250 tracker fund would give an investor exposure to some of the biggest companies in the UK. This should help them achieve strong capital growth as well as income over the long run.
So, investors shouldn’t read too much into Buffett’s recent trading activity. While he was selling stocks in the first quarter, he still believes the stock market is the best place to create wealth over the long run.
Even though the near-term outlook for global equities is uncertain, buying a low-cost tracker fund should help you grow your financial nest egg without having to worry about daily market fluctuations.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.