Warren Buffett isn’t just one of the greatest investors of our time; he’s also one of the best investment teachers. Whenever the man speaks, it can pay massive dividends to be all ears. And whenever he acts, it can feel tempting to follow the man blindly into a name.
While Buffett’s moves should be treated as implicit hints as to where the best top-down opportunities may lie at any given instance, one should never ride on Warren Buffett’s coattails without a thorough understanding of the business he’s eyeing and the long-term opportunity that could be at hand.
Sure, Warren Buffett’s favourite holding period is forever. But not even he can justify holding a stock for life, as the rapid rise in disruptive technologies can change a sound investment thesis over just a few years. As such, investors should embrace Mad Money host Jim Cramer’s philosophy of “Buy and Homework,” in this new age, rather than Charlie Munger’s “buy-and-sit-on-your-bum” philosophy to investing. Investment theses can change at any time. When they do, investors need to re-evaluate their original investment thesis to ensure it still holds in the face of potential disruptions.
Warren Buffett added to his stake in the airlines just months before he ditched them over concerns over the rapidly-spreading coronavirus. Buffett’s a long-term investor at heart, and at the age of 90, he’s still one of the most patient people on the planet. So, it was strange when he flipped shares of some of his favourite airlines in just a few months.
COVID-19: The black swan that destroyed many theses
The coronavirus crisis essentially changed Warren Buffett’s thesis on the airlines overnight. And Buffett was more than willing to take the loss and look foolish (that’s a lower-case “f,” folks!) with a mistake that he acknowledged. Whether or not Buffett’s decision to ditch the airlines will turn out to be a good one, a vital lesson to be learned from his drastic move is never to get stuck holding onto a name that you no longer believe in.
The coronavirus disease 2019 (COVID-19) turned the once profitable, predictable, and highly investible airline stocks into a questionable speculation in just a few weeks, as the world recognized the catastrophic potential of the insidious coronavirus that was starting to sweep the nation.
For air travel stocks, the coronavirus had blurred the lines between investment and speculation. And as an investor who’s all about favourable risk/reward trade-offs, Buffett no longer wanted anything to do with the airline stocks that may have turned into big, fat zeros if a bear-case scenario were to unfold with the pandemic.
The airlines’ economics in a pandemic suddenly became nightmarish, and there was no telling how long they’d have to operate in the “new normal” or if they’d even make it on the other side of the pandemic. Warren Buffett’s pre-pandemic thesis on the airlines likely no longer held up.
He didn’t want to run the risk of getting caught with steeper losses if worse came to worst, especially given Berkshire Hathaway was already exposed to the COVID-19 impact through Berkshire Hathaway‘s wholly-owned businesses such as Precision Cast Parts, which stood to take a brunt of the damage.
Warren Buffett: Getting out of the way of a rapidly falling boulder
Adding to Berkshire’s COVID-19 exposure no longer made sense. So, Warren Buffett took the hit by selling the airlines so that he’d be better able to sleep at night. Many Canadian investors may have found themselves stuck in a similar predicament with names like Cineplex (TSX:CGX) amid the crisis.
A pandemic and the potential for long-lasting shutdowns made the movie theatre firm among the worst businesses to hold. Many investors who had too much pride to take a loss or to revisit their original investment theses got hit with even steeper losses, as Cineplex stock proceeded to lose over 85% of its value when investors were already in a state of panic over the coronavirus.
If an event(s) change a thesis, you should re-evaluate it and take the right course of action, regardless of how “foolish” you’ll feel. Warren Buffett isn’t one to stick with names he no longer believes in — and neither should you!
