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Warren Buffett’s unintentional wake-up call for investors and how you can profit now

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Warren Buffett sold his stocks in America’s ‘big four’ airlines during the Covid-19 stock market crash.

But he’s known for being greedy with stocks when others are fearful. So his dumping of the airlines might have been a bit of a shock for some investors. Especially those piling into airline shares with his avuncular advice ringing in their ears.

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Warren Buffett’s hatred of airlines

Yet Buffett’s move starts to make more sense when we reflect on his tendency to buy the shares of high-quality companies when they are selling at discounted prices. The trouble with airlines is they tend not to be high-quality enterprises.

Read Buffett’s history and it’s clear he’s been no fan of airlines and regarded them as poor-quality businesses. Indeed, they are cyclical in nature and dependent on a huge array of ducks lining up to prosper. For example, manageable oil prices, consumer demand, economic stability – and the absence of a pandemic!

He once wrote of airlines: “Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.” He also reflected on his own bitter experience saying he, “participated in this foolishness” when he bought shares in US Air in 1989.

That explains why he didn’t load up with the shares of airlines when the ‘story’ changed recently in the coronavirus crash. But It doesn’t explain why he bought them in the first place. Especially after being so vehemently against them previously.

How he changed his mind

The answer to the conundrum is nuanced. Buffett apparently ended up investing in the big four airlines because he predicted more people would fly and the carriers would at least maintain their value and continue buying back shares. He said in a 2017 interview that the airlines had a bad 20th century and “I think there have been almost 100 airline bankruptcies. I mean, that is a lot. [But] they got that bad century out of the way, I hope.”

Oops! We’ve all failed to act on the lessons we’ve previously learnt from time to time. To his credit, Buffett threw his hands in the air and declared he’d made a mistake as soon as Covid-19 altered his perception of prospects for the airlines. He acted decisively and sold, cutting his losses short because a losing holding is perhaps the biggest threat to any investors’ portfolio. Losing positions can turn outperformance in some shares into a mediocre or even losing performance overall.

My guess is he allowed his mind to wander into the realms of a previously hated sector because of the sheer difficulty of finding homes big enough to accommodate investments measured in billions.

A wake-up call

The tone of Buffett’s homespun, folksy and avuncular advice often makes investing sound easy – which it can be if you are investing in index tracker funds. But following gurus – even Buffett – can be dangerous if you don’t work hard researching and monitoring when picking individual stocks.

I reckon Buffett’s reversal with the airlines emphasises something else too: unless you’re buying the whole market with an index fund, don’t apply Buffett’s be greedy philosophy indiscriminately.

And since the coronavirus crisis, I reckon we are in a stock-picker’s market more than ever.

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Kevin Godbold has no position in any share 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.

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