Everyone is confused – He bought a bunch of airlines at their peak, and sold them all (was the normally undaunted investor suddenly in a panic?) at the bottom. “Fear is the most contagious disease you can imagine…” said Buffett at his annual shareholder meeting. He also said:
“It all depends on your circumstances, but you shouldn’t buy stocks unless you expect… to hold them for a very extended period of time and are prepared financially and psychologically to hold them,” Buffett explained.
Surprisingly, the one man we thought would be buying the downtrodden airlines when they looked hopeless, was bailing. I’ve read many (hindsight is great) comments from experts claiming they couldn’t understand why he bought airlines in the first place. After all, its a notoriously volatile industry and hardly one we’d consider his ‘cup-of-tea.’ But sitting on a hoard of cash during a raging bull market, while being constantly questioned (pressured?) about it eventually makes one begin to wonder: “Am I wrong?”
Step back a few months. The whole market was (and probably still is) overvalued – some of us even said so in print, most others now claim to have ‘thought so’ but did or said nothing as evidence.
Mr. Buffet said and knew it, but may have felt he had to do something and found the only sector that looked reasonably valued by conventional measures – the airlines were making good money, the world was jet-setting like never before and their valuation metrics (P/E ratios etc.) were not astronomical. He is bold enough now to admit he made a mistake and takes full personal responsibility.
What is so bewildering is:
- He didn’t hold the companies (he’s always insisting he buys companies and not stocks) for the longer term, as we’ve come to expect.
- We would normally expect him to be buying the more down-and-out companies during a crisis like this.
After all, the same guy bailed out the major US banks during the last financial crisis, and later saved Canada’s mortgage lender Home Capital when they were in dire straits. Brave moves like these made him and his shareholders lots of money.
I can think of two possible explanations. One is he too became afraid. After all, Mr. Buffett is 89 years old, and the ‘longer term’ just isn’t as long anymore. I don’t mean this in a mean way at all – I too am getting older and my perspective when it comes to ‘time’ has changed meaningfully if not necessarily for the better. Keeping those airline stocks (even if averaging down) would have been an eyesore for a very long time.
The second explanation I like better. Perhaps Mr. Buffett (and I would agree) believes things will get much worse before they get better. Stocks are still too expensive to be interesting, and the global economy continues to shrink. The cash hoard can be put to even better use now that virtually all industries have been devastated by the lock-down (with perhaps the exceptions like Amazon, grocery stores and divorce lawyers). No doubt he and his successors will have their pick-of-the-litter in due course. This explanation is more consistent with his wise words (more than 30 years ago):
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Now is perhaps the time to offload mistakes, or simply those investments that are marginal and have enough ammo to make bigger better bold moves when the dust really settles. He’s not so much fearful, but rather getting ready to be greedy.