Investors like to repeat Warren Buffett’s instruction to “be greedy when others are fearful” to themselves. But this is one of those instructions that’s fine in theory, but the reality is often different.

Don’t sell?

When share prices start going down quickly, it can be tempting to try and limit the damage by selling before they go lower. But this is a very risky strategy. 

Just as nobody knows when stocks will crash, nobody knows when they will recover. And the start of the turnaround is usually when the share price climbs the fastest.

Nobody buys shares with the intention of selling them at a lower price. But these events have a way of getting people to make decisions they might later come to regret.

Despite this, I don’t think selling is the worst thing an investor can do in a stock market crash. It can be a bad idea, but there’s something much worse available.

Don’t panic!

In my view, the worst thing someone can do in a stock market crash is panic. Avoiding this might be easier said than done, but I think it’s the one thing that can’t possibly be of any help. 

When share prices are volatile, it’s more important than ever to keep a clear head and make reasoned decisions. And panicking can only get in the way of this. 

Even selling can be a good idea – as Warren Buffett’s investment in American Airlines (NASDAQ:AAL) shows. After buying the stock at around $45 per share in 2017, Buffett sold the last of it in 2020 at $12 per share.

The stock subsequently doubled in 2021, which makes Buffett’s decision to sell look like a bad one. But there’s a lot more going on beneath the surface than this simplistic observation reveals. 

Selling in a market crash

Between 2019 and 2021, American Airlines saw its long-term debt increase by around 66%. And it ultmiately needed assistance from the government to prevent the firm from going bankrupt.

At the time, Buffett reasoned that if the airline had Berkshire Hathaway as an investor, the required cash might not be forthcoming. Their cash-rich major shareholder might be required to step in instead.

It’s worth noting that American Airlines still hasn’t fully recovered from the effects of the pandemic. Its long-term debt is still higher than it was in 2019 and the share count has kept increasing. 

The prospect of falling oil prices should help bring down costs in 2025. But Buffett may well have been wise to get Berkshire Hathaway out of harm’s way by selling when the stock was near its lows. 

Keep calm and keep investing

Buffett decided to sell shares in American Airlines and the other major US carriers near their lows. This may or may not turn out to have been a good decision – and maybe we’ll never know. 

What I am convinced of, though, is that Buffett absolutely made a calculated decision. And I think this is the key – in a stock market crash, I think the worst thing an investor can do is panic.

The post Here’s the worst thing to do in a stock market crash (it isn’t selling) appeared first on The Motley Fool UK.

Competitors’ results

Industry giant United Airlines announced its 2021 Q1 results on Monday. These were unsatisfactory to say the least, with a net loss of $1.4bn. Operating revenue was also down by 66% compared to 2019, falling to $3.2bn. CEO Scott Kirby explained the pandemic had decreased demand by 80% for United Airlines, which was the primary source of its losses.

This disappointing report seems to have impacted the recent rally of airline share prices, highlighting the profitability problems most firms are still dealing with. Delta Airlines also fell 5% and American Airlines tanked 7% in reaction to the news.

IAG had already shared some disappointing news in late February in its Q4 results. Total revenue was down 69% while gross debt rose from €14.3bn to €15.7bn year-on-year. In addition to this, the total number of passengers carried was down 84%, which highlights the pandemic’s inescapable impact. This was felt most heavily through IAG’s Aer Lingus airline. But it wasn’t all bad news.

A more positive future outlook for the IAG share price?

Due to a massive reduction in flight numbers, IAG was able to trim a healthy 44% of operating costs. This has helped the firm build a stronger liquidity position than before the pandemic. This is great for it going forward as due to debts increasing, it’s essential to be able to counteract these with a stable cash flow position.

The firm also highlighted the positive response to the UK government’s roadmap for exiting pandemic restrictions. IAG’s British Airways saw bookings flourish in the immediate aftermath of the news. The firm won’t operate at full capacity any time in the near future, but the travel sector is likely to boom in the next year and beyond. People have been stuck in their homes and want to travel freely again. This is likely to benefit the IAG share price for years to come.

The IAG price-to-sales (P/S) ratio is 0.98. For comparison, competitors Delta Airlines and Southwest Airlines have P/S ratios of 2.2 and 3.91 respectively. A lower P/S ratio tends to indicate that a stock may be undervalued in comparison to its competitors. This metric points me towards buying the stock at the current share price.

My Verdict

It’s clear the airline industry has faced some turbulence. I believe the United Airlines results scared airline investors into dumping some of their shares in the wider sector. The results also highlighted that firms are still struggling and will continue to struggle with the impacts of the pandemic, even though normality may seem close. However, I would use this opportunity to grab some cheap shares for my portfolio, as I’m bullish about the travel industry’s long-term future.

The post The IAG share price fell 8% yesterday. Here’s why appeared first on The Motley Fool UK.