Buffett Was Wrong To Sell Airlines

By Michael Hooper

I think Warren Buffett was wrong when he sold his airline stocks during the Coronavirus pandemic. I recently purchased shares of stock in United Airlines (UAL), Southwest Airlines (LUV), JetBlue Airways (JBLU) and Spirit Airlines (SAVE).

Warren Buffett has favored owning hard asset companies like railroads, utilities, manufacturers, banks and insurance companies. He has avoided tech companies because he was afraid new technology would replace the old, leaving some companies behind to die. He is usually the most consummate long-term investor, he typically holds onto stocks for life. Yet he has sold companies. He bought IBM, held it for several years and sold it with no gain. He missed out on a much better tech play with Microsoft that was right there in front of him with Bill Gates on his board of directors for so many years, Buffett had an inside view on Microsoft, now worth $1.4 trillion in market cap compared to $108 billion market cap for IBM. The fact that Buffett chose IBM over Microsoft shows his old man ways stuck in the past. IBM was a name he was familiar with for half a century. Microsoft was a newcomer to the world of tech compared to IBM yet Microsoft made itself into a much larger and more profitable organization than IBM. He’s not all bad at tech, considering Berkshire Hathaway (BRK.B) has a huge position in Apple.

Warren Buffett has owned the airlines before. Buffett invested in US Air in the 1990s, but a price war scared him out of the business. The low-cost carriers expanded their seats, forcing the old-time airlines to lower their fares or face extinction. Buffett didn't think the business was sustainable so he sold his position in US Air. Since then, the airlines have found ways to improve their margins and stay airborne.

Prior to Covid-19, consumers had it good with airline travel, you could fly anywhere in the world at a reasonable price. And the airlines made enough money to stay alive and even pay dividends. Then the Covid-19 crisis hit and airline travel virtually stopped overnight. I think Buffett panicked when he sold the airlines in March-April 2020. He had never seen a stock market crash related to a pandemic before. He had never seen airlines' income vanish overnight. This halt in travel was unnerving. Airlines got a bailout from the government. Buffett doesn't want his companies dependent on the government for bailouts.

With millions of people being laid off during the pandemic, the outlook for stocks looked bleak when Buffett sold his airline stock. Yet U.S. stocks did not stay down long, firing a comeback in April and May. Investors believe somehow the world will find a way to deal with Coronavirus. We believe a vaccine will be found. This faith will carry us forward but we don not know the future and there is no guarantee scientists will create a vaccine that works. There are some promising drugs, but anything can happen. A resurgence in Coronavirus cases is already occurring in places like Florida and Texas where they have opened up their economies.

My portfolio is 74% equities, 22% bonds and 3% cash. So I'm pretty much fully invested. During the downturn I sold some ETFs in the S&P 500 and bought stocks like Apple, Google, Union Pacific, Church & Dwight, Norfolk Southern, Hershey, Casey's General Stores and Visa. As of this writing my portfolio is down 11% year to date, largely because of an overweight position in Berkshire Hathaway. My portfolio was up 18% in 2019.

I bought Southwest Airlines at $26.62 per share on May 11 and then sold my position on June 5 at $37.96 per share for a 42.6% short term gain. I bought United Airlines at $24.52 per share on May 11th and then sold at $42.04 per share on June 5, a 71.45% return. On June 15th I bought back into Southwest Airlines at $36.45 per share and United Airlines at $39.13 per share. I bought JetBlue Airways at $14.25 per share and Spirit Airlines at $24.16 per share.

Airlines will survive. People will eventually travel again. We are a mobile nation. On The Road by Jack Kerouac is a way of life for many people. The adventurous spirit is part of the American Dream.

I am not giving up on Warren Buffett even though I think his best years are behind him. In fact I bought a few more shares of Berkshire Hathaway in the downturn. His company owns about 100 great businesses like Geico, BNSF Railway and See's Candy. It's full of cash, and really undervalued below $200 per share. I have Berkshire Hathaway stock that I have held for over 20 years.  Buffett has been my mentor. I followed him into the railroads in 2009 and 2010. I hope that Buffett will give more cash to his top lieutenants to invest like Todd Combs and Ted Weschler. These two guys are younger, agile and more attuned to the times than Buffett.

The police killing of George Floyd in Minneapolis exposed a deep vein of racism in America, this touched so many lives, people have protested against racism here and around the world. I could not believe the stock market was climbing while there was mayhem in the streets. I hope something good comes of his death, that perhaps we can train police in ways to de-escalate violence rather than increase violence after they come upon a scene.

Presidential election years often are good years in the stock market. I still think the US stock market in the United States is the best place to be invested. I hope doctors find a cure to the Coronavirus soon. Meanwhile stay safe everyone, stop racism now and happy investing.

Editor's Note: The author owns stock in Berkshire Hathaway as well as the airline stocks mentioned in this article.