Why Buffett Was Wrong to Dump Airlines

Warren Buffett is arguably the most respected and accomplished investor in U.S. history. He turned Berkshire Hathaway, a struggling textile company, into a multibillion-dollar holding company. Since 1987, Berkshire’s Class A shares have delivered an impressive compound average growth rate (CAGR) of 14.91 percent.

That doesn’t mean all of his investing decisions should be seen as gospel. He famously doesn’t like gold, for one. And in 2018, he admitted that he was wrong to underestimate Amazon and Google early on.

“I was too dumb” to recognize the opportunity, Buffett explained. He added that he and Charlie Munger, his longtime business partner, “miss a lot of things, and we’ll keep doing it.”

I believe we can add another misstep to Buffett’s otherwise successful career. This past week, the “Oracle of Omaha” revealed that he recently dumped his entire stake in the big four U.S. airlines—Delta, American, United and Southwest. As of the end of December, the position collectively stood at around $10 billion.

Buffett’s decision to exit airlines seems to have stemmed directly from the coronavirus lockdown and its impact on the travel industry. In other words, it had nothing to do with how the carriers were being managed.

“We were not disappointed at all in the businesses that were being run and the management,” the billionaire investor told Berkshire shareholders on Saturday. “The world changed for airlines,” he added.

While I agree with Buffett that the COVID-19 pandemic has been a challenge for airlines, I disagree with his decision to dump airline stocks for that reason. Few industries have escaped unscathed from the virus’ impact, after all. Berkshire is highly exposed to banks and insurance—banks are bracing for a wave of defaults and bad loans while COVID-19 could potentially bankrupt the insurance industry—and yet we haven’t seen Buffett cut Bank of America or Travelers from his portfolio.

I wouldn’t be surprised if his divestiture was also prompted in part by a general concern of the virus itself. Last week I shared with you data showing that the average age of deaths in confirmed COVID-19 cases is 82. Buffett will be turning 90 in August, putting him in the riskiest age bracket.