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Warren Buffett: Be Fearful When Others Are Fearful - Wait, What?

May 05, 2020 8:00 AM ETOXY, T, BRK.B, BRK.A, UAL, DAL, AAL, LUV174 Comments


  • Warren Buffett seems to have made a 180 regarding his most famous investing maxim "Be fearful when others are greedy, and be greedy when others are fearful."
  • During his annual shareholder meeting, Buffett decided he made a mistake when it came to investing in airlines.
  • Berkshire sold $6.5B of equities in the month of April, selling its entire stake in all airlines it held, occurring while there was a high level of fear.
  • This underpins my personal maxim that “Sometimes when you go against the herd you get trampled,” as well as a few other important investing principles I've learned over the years.
  • In the following column, I provide my take on lessons learned from Buffett's airline bungle and present the one stock I would buy and hold now.

Executive Summary

Something very interesting happened this weekend at the annual Berkshire Hathaway (NYSE:BRK.B) (NYSE:BRK.A) meeting. Warren Buffett seemed to go against one of his most famous, if not the most famous, maxims.

Be fearful when others are greedy, and be greedy when others are fearful.”

Buffett broke the news that he recently sold out of his 10% stake in the four major airlines; American (AAL), United (UAL), Delta (DAL), and Southwest (LUV). Luckily, I just sold out of my position in Delta for a 22% gain.

Buffett stated:

With the virus effectively shutting air travel, the airline business — it changed in a very major way. With four airlines likely to borrow $10B-$12B each from the government, that takes away from the upside."

In the following piece, I will briefly expound on the important investing lessons learned from Buffett’s bungle, provide my macro view on the current state of affairs, and divulge the one stock I see as a buy and hold even under current conditions.

Lessons learned from Buffett botch

The lessons learned from Buffett’s botch in buying the airlines are three-fold.

  • No one is perfect. Everyone makes mistakes. The important part is to realize you have made a bad call, face the facts, and take action quickly to resolve it before losses get out of control.
  • It’s not always best to go against the grain. Sometimes the consensus view is correct. Don’t try to overthink things too much. Sometimes the market and stocks drop for good reason.
  • Don’t get caught up in the sunk cost fallacy. The sunk cost fallacy in layman’s terms is basically just throwing good money after bad. I learned long ago you don’t have to make the loss back on the same position. Sell the stock and redeploy the funds in a new position with better

This article was written by

David Alton Clark profile picture

David Alton Clark is a U.S. Army Veteran and a former public auditor, bank executive, FINRA securities broker, with over 30 years of experience in portfolio management. In 2020, David was named "Stock Picker of the Decade" by Yahoo Finance. He specializes in the understanding of full market cycles, having successfully navigated the bubbles of 2000 & 2008.

David is the leader of the investing group The Winter Warrior Investor, where he shares "best-in-class" high-yield income and growth securities trading for attractive valuations. Features of The Winter Warrior Investor include: Model portfolios with tracking, a weekly top idea, weekly macro insights, monthly videos, and access to David and his community via chat. Learn more.

Analyst’s Disclosure: I am/we are long T. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am also short OXY.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (174)

ackinvestor profile picture
W/r to your second Lesson learned from Buffett..."It’s not always best to go against the grain. Sometimes the consensus view is correct".
50 years ago I was in the training program at Smith, Barney. President of SB Bill Grant was addressing the group. I still recall his words: "Remember that in investing if you are the only smart guy in the room, by definition you are wrong."
David Alton Clark profile picture
Hey! Now that makes me feel good ACK! Much Appreciated! That was a very succinct way to put the point I was making! I'm stealing that one! Ha!DAC
BlackRock's Larry Fink warns of tougher times. Hence, I use 2009 equity prices as an approximate bench mark. Expect another 30-50% correction , when the real world wide depression hits the global market. Apparently , we are entering 1929 like lost decade.
TaiPan profile picture

Lots of guesswork required, since we are in "uncharted waters". But why 2009 prices? Why not even-earlier years? And can we not assume that the market has discounted those tougher economic times already?
You pose very good question. I have to have some target. It's not etched in stone.
Xempler profile picture
Let's face it...none of us knows what America or the world is going to look like by the 4th of July, or Christmas, so we just have to put our money where our mouth is. Best of luck to all investors.
' So, bottom line, even the great Oracle of Omaha can make a mistake once in a while. Yet, he steps up to the plate, admits he was wrong, and closes out the position before it gets out of control. '

I think it got out of control.
David Alton Clark profile picture
you know what Jet... you got me on that one! It did get out of control! Good catch! Ha! DAC
TaiPan profile picture
Author :

When you use the “trading range” of the S&P 500 to decide when to buy and sell, are you applying that signal to individual stocks?

I find that each stock has its own trading range, often different from the general market, and so a particular stock might be a BUY even when the overall market is signalling “SELL”, and vice-versa.
David Alton Clark profile picture
Yes Tai! This is true. But in the initial swings during the very high vol there was a lot more correlation. Even so, you had to do your research to see which ones were the most highly correlated and go with those. The top and bottom of the trading range is when you should start seeing resistance. Its not the ultimate buy or sell trigger, more like a warning light to say ... hey better check your positions and if you are up maybe take some profits. But, you are correct the entire cohort of stocks is not 100% correlated to the highs and lows. Some actually a negative correlation. DAC
Petrarch profile picture
Our business has been improving since the mid-April low
We are up 20% week over week this week
We are closing in on 60% of pre crisis activity levels
We expect it to be back 100% by August - if not sooner
We may be earlier than others but visibility is slowly returning in May
Our issue now is bringing people back to meet the demand
If you don't mind me asking, Petrarch, what sector is your company active in?
F86 Sabre profile picture
I'm long T also and glad of it. What are your thoughts on VZ?
David Alton Clark profile picture
I like VZ as well. Just like T a little more. T is my Communications sector top pick. DAC
ackinvestor profile picture
Take a look at T's reserves. Their promotions - giving away (or discounting) iPhones if you take a two year contract - are the current version of how sub-prime mortgages were underwritten in '06 and '07 , i.e. NO underwriting. A lot of those two year contracts will not be paid in the next 12 - 18 months. That's why they have the reserves. I'm just saying that the reserves are insufficient. It will get ugly.
David Alton Clark profile picture
Ok! Thanks ACK! I will take that into consideration! DAC
it's true that 'No one is perfect. Everyone makes mistakes.'.
The difference is how one deals with his/her mistake. Buffet admitted his mistakes and cut the loss in order to preserve cash for future use. what will /did we do with our mistake in the investing?
David Alton Clark profile picture
Great insight Jean! Thanks for contributing to the conversation! DAC
carlostabs profile picture
The total market PE doesn’t reflect a scared market.
David Alton Clark profile picture
Actually it does Carlos! I am going to write another piece about that specifically. Yet, for the purpose of this article specifically I was referring to Buffett selling out at the bottom for the airlines reflecting the fact that for the airlines specifically there was a large amount of fear. Not the marklet as a whole. DAC
Excellent article. I may not agree with you totally on T. I am very concerned about there debt load and the coming competition in the streaming wars. I am also long T.
David Alton Clark profile picture
I hear you brother Chip! Nothing is a sure bet! DAC
bo0bo0 profile picture
Like all of us, Buffet has said a lot of stupid things over the years. To be fair, of course, nobody will follow a single maxim 100% of the time.
Man has made a ton of money for his investors. Good Fellow to now say his fortune will go to help others when he passes. In the real world maybe his time has passed. Life was so simple and so easy when Mr. Buffett started. For me would also give a shout out for Peter Lynch of Fidelity that ran the Magellan Fund from 1977. For some of us lucky enough to get in early it was a juggernaut. Buy and Hold was working really good back then.
David Alton Clark profile picture
Yes! It sure was! RAK! I am a huge peter Lynch fan as well! One of his more obscure quotes, yet one of my favs is "“Stocks you trade, it's wives you're stuck with.” haha! Still makes me laugh! DAC
The easiest charity is when the wealth is no longer of any use to you. Giving 10% of your gross every year when things aren't going well, is what truly separates the men from the boys.
Government bailed out airlines, allowing Buffet to cash out. Do we little people need to continue to pay Buffet? Covid 19 raged in China since December, and Buffet took no action. Now we have to pay him. WTH?
David Alton Clark profile picture
I hear you Tiger! The world is not fair. DAC
New Low Observer profile picture
"Warren Buffett seems to have made a 180 regarding his most famous investing maxim 'Be fearful when others are greedy, and be greedy when others are fearful.'"

More like, he did a 180 when he bought airlines as his other famous quote:

"If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money."

Was ignored.
alphaseek2018 profile picture
The difference this time is most of his retail businesses are struggling due to the pandemic. Hence the need for more CASH in these difficult times. This is far different from the 2008/2009 financial crisis. This is a health and financial crisis. CASH IS KING in times like this!
David Alton Clark profile picture
100% agree Alpha! That is why I went to 100% cash at end of jan and still 90% cash. Uncertainty 100% Visibility 0%. DAC
100% cash is just gambling

I was around 50% cash and got it all back in...Kept buying the dips till it was all gone. The entire point for me of going to cash was to get better prices...I got them, and I acted. Came very close to the market running away on me. Had there been no pandemic, the Dow was on its way past 30k imo

You made the right move in Jan but the wrong not getting back in March
David Alton Clark profile picture
Hello everyone! I have been busy in the market this morning! I have covered my short in OXY FYI! I still have a few things to take care of and then I will come back and respond to all comments! Thank you for your participation. I learn from all comments positive or negative! Thanks, DAC
He acted according to his belief. Others are greedy with everything at the moment (including airlines), so he is fearful.
The airlines will have zero earnings for the foreseeable future. They should be priced accordingly. He made the right decision as far as I'm concerned
David Alton Clark profile picture
The point I was making Gor was the airlines were down 60% at the lows when he sold. The fear factor in them was and remains high as far as buyers coming to the rescue is concerned. DAC
David Alton Clark profile picture
Agreed John! Misery loves company... I'll take a pass at this point. There are better opps out there. DAC
But... the market isn't fearful, yet. Everyone is trying to "buy the dip". That's not fear. That's greed.

Bear markets end in despair, not greed.
Except the fed is pumping the market. In fed markets bear markets die quickly, and new highs come fast

The all cash gang ends up looking foolish...And eventually buys the new highs
David Alton Clark profile picture
I am talking specifically about the airlines. I agree the market is not yet fearful T! DAC
XTigerX profile picture
LOL! Flamebait article.
David Alton Clark profile picture
I had never heard of the term Flamebait before Tiger! Thanks for teaching me a new word. After reading the definition I agree! When I heard about Buffett selling out of airlines at the lows I thought of the title be fearful when others are fearful and surmised that it would cause a stir and get a conversation going! DAC
What is "flamebait"?
David Alton Clark profile picture
A provocative title that initiates discussion about a certain topic. It fires people up! I have always referred to my articles as fire starters so flame bait is a compliment in my eyes! DAC
If he only sold airlines, I wouldnt read that into being fearful. The fundamental reasons he bought them to begin with changed and he sold them at a value he believed was a good price based on those fundamentals. If he had been afraid, he wouldnt have bought them at the times he did. He bought at the wrong time because he was greedy not afraid. He actually probably sold at a good time. The government bailout was anything but free money.
David Alton Clark profile picture
I hear you Mr. N! Good point! DAC
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