Warren Buffett broke his own rule when he panic-sold in April. Now the stock market is making him pay for this embarrassing rookie mistake.
When Warren Buffett dumped all of Berkshire’s holdings in four U.S. airline stocks, he said the “world has changed for airlines” and that he’d made an “understandable mistake” investing in them in the first place.
A month later, it’s clear Buffett made a mistake, albeit one that’s far less understandable – and exponentially more embarrassing.
Buffett – hailed as the greatest value investor of our time – appears to have made a classic rookie investing blunder. He panic-sold at the bottom, and now the stock market is making him pay.
The airline industry was one of the first sectors pummeled by the global pandemic. Flight groundings began even before the nationwide lockdown, and analysts warned that fears of infection could limit passenger numbers long after stay-at-home orders expired.
Industry analysts initially estimated that airline passenger sales could drop as much as $314 billion this year, a 55% nosedive compared to 2019.
Buffett shared a similarly-bearish outlook when he revealed that Berkshire had dumped its airline stocks:
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…
Berkshire had invested as much as $8 billion in American Airlines, Delta Airlines, United Airlines, and Southwest Airlines. Buffett admitted that he sold those shares “at far lower prices than we paid.”
His willingness to incur such massive losses suggests that the airline industry should be on the verge of collapse. Instead, airline stocks are rallying aggressively as the economy reopens and demand bounces back.
It looks like mom-and-pop got this one right. As for Warren Buffett? He panic-sold at the bottom.
In April, the month Buffett sold his airline stocks, American Airlines traded as low as $9.11. But after dipping to $8.25 the following month, AAL stock took flight and has surged more than 100%.
It’s a similar story for United and Delta.
DAL and UAL shares are still well off their yearly highs, but they’ve also bounced around 80% off their lows.
Even Southwest – the relative laggard – is up over 70% from its 2020 low of $22.47. All four airline stocks carved a bottom within a month after Buffett cashed out.
The Oracle of Omaha must have seen that Berkshire booked a $50 billion hit in the first quarter and decided to cut his losses, starting with airlines.
Understandable? Maybe. But as Buffett himself taught us, when investors capitulate, the bottom is often in sight. That appears to be the case here.
Warren Buffett – as bizarre as it feels to say it – made a classic rookie mistake. And considering his other recent trades, maybe it’s time to buy bank stocks next.