Did Warren Buffett sell his stake in airlines prematurely? President Trump thinks so.
Trump criticized Buffett on the heels of a record jobs report. The Bureau of Labor Statistics said on Friday that U.S. employers added 2.5 million nonfarm payrolls in May, a shocking figure that defied economists’ expectations of 7.5 million jobs lost.
The unemployment rate fell to 13.3%, much better than the 19% economists expected.
These results, along with rising investor optimism about the reopening of the U.S. economy, boosted the stock market. The Dow Jones and the S&P 500 soared 3.1% and 2.6%, respectively, on Friday. The Nasdaq jumped by 2.1%, reaching a new all-time high.
Warren Buffett sold airlines a little while ago. He’s been right his whole life, but sometimes even somebody like Warren Buffett — I have a lot of respect for him — they make mistakes. They should have kept the airline stocks because the airline stocks went through the roof today.
At the Berkshire Hathaway annual meeting in early May, Buffett revealed that the company had sold its entire position in the U.S. airline industry.
The prior stake, worth north of $4 billion in December, included United Airlines Holdings (NASDAQ:UAL), American Airlines Group (NASDAQ:AAL), Southwest Airlines (NYSE:LUV), and Delta Air Lines (NYSE:DAL).
Demand for travel fell abruptly as stay-at-home orders kept potential passengers at home.
As a result, airline stocks plunged sharply at the start of the pandemic. The biggest loser was American Airlines, which lost about two-thirds of its value.
Buffett admitted that he had made an “understandable mistake” in valuing airline stocks as a near-global halt to travel brought down their prices.
To justify his decision to sell airline stocks, Buffett said that the world has changed for airlines.
I don’t know that three, four years from now people will fly as many passenger miles as they did last year. You’ve got too many planes.
Airline executives have called the pandemic the worst industry crisis and expect the recovery to take years to play out.
Flying is about to get a lot more expensive, as costly new safety measures will lead to a significant jump in ticket prices. Planes will fly with fewer passengers to respect social distancing.
If people aren’t willing to pay higher prices, airlines will have to lower them to attract passengers.
But low prices may not be enough to inspire people to book trips until the health and economic conditions of destinations have stabilized. Airlines will be in big trouble if demand doesn’t come back.
The rally in airline stocks, just like the rest of the market, is driven by investors’ optimism. But when investors see signs that airlines aren’t recovering fast, airline stocks could plunge again.
Trump shouldn’t criticize Warren Buffett’s investing decisions. Buffett knows what he’s doing.
Buffett has a long-term perspective and is looking for undervalued stocks in reliable businesses. Airline stocks just don’t fit his investing criteria anymore.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.
Last modified: September 23, 2020 1:59 PM