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

Summary

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 prospects for profits.

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 have a special affinity for Buffett as I was born and raised in Omaha, Nebraska, and my father was a stockbroker as well. Some in the investment community refer to me as the Oracle 2.0. Not because I’ve performed as well as Buffett, but because I’m twice the size! Ha! Now that I’ve completely embarrassed myself, I’d like to lay out my assessment of where we go from here and reveal the one stock I held through the crash and would still buy today.

Current investing environment

Dangerous time when visibility is zero

Right now, uncertainty and zero visibility rule the day. We have utter uncertainty about how the reopening of the economy will unfold. The only sure thing we know is it is going to a long slow slog. Most states are starting to reopen but only at 25-50%, shackled by social distancing standards. What’s more, visibility regarding company earnings is at an all-time low with a majority of companies pulling guidance. This is eerily similar to how things played out during the great Depression. Furthermore, the charts are nearly 100% correlated.

Now, don’t get me wrong, I am not saying it’s 100% we are going to follow exactly how things went in the years after the 1929 crash. Yet, it is important to understand this outcome is a possibility. I don’t believe a lot of current market participants realize it could take several years, maybe even over a decade to reclaim the old highs. Some say it didn’t take as long as the commonly reported time frame of 25 years after the crash of 29, yet suffice it to say, it took a long, long time.

Highly volatile market within a well-defined trading range

I see no end in sight to volatility. For the next few months I see the market trading with a tight trading range. See chart below.

(Source: Author's chart)

I have been using these ranges to successfully trade in and out of several stocks. I recently sold out of my long positions, except for one, and went short Occidental Petroleum (OXY) which happens to be another one of Buffett’s failed picks. The reasons to short OXY are many. I am not recommending anyone follow me into this trade at this time because the stock has already fallen from where I got in. I went to cash in early February after President Trump restricted travel from China. Nevertheless, the one stock I held throughout the selloff is AT&T (T). I am highly confident in AT&T, yet would wait to buy after the market pulls back to the lower end of the range. Let me explain.

AT&T has stood the test of time

The stock is a dividend aristocrat paying the dividend through thick and thin for 35 years. Even so, AT&T is transforming from being a primarily widow-and-orphan stock to a dividend growth/total return play.

(Source: Author's chart)

The company has plenty of cost-cutting left to do as well. I see a slow and steady rise in the dividend payout and share price overtime. The risk/reward equation at present is highly favorable. Let me explain.

Strong fundamentals

AT&T’s fundamentals are extremely strong with a forward P/E of 8.92, a P/FCF ratio of 15, and book value per share at $25. AT&T has ample free cash flow to pay down the debt, fund the dividend, and still have some left over to spend on growth prospects.

Dividend is top priority

The telecom giant made it abundantly clear recently that the dividend is a top priority in its last announcement. With the recent need to bail out several industries, Congress has begun to focus in on the return of capital to shareholders in the form of share buybacks and dividends. This has given some dividend payers the green light to cut or suspend the dividend. Nonetheless, AT&T is one of the most reliable dividend payers. In fact, AT&T’s dividend has consistently increased since 2007.

AT&T Wrap-up

This is a safe dividend/income play and is ideal for those looking for income combined with capital preservation.

(Source)

I see a slow and steady rise in the dividend payout and share price overtime. If things go well, and the COVID-19 outbreak subsides, we could see the stock climb quickly back to the $40 level over the next 12 months, implying 30% upside as well as a hefty 6.8% dividend yield.

Final Thoughts

We have entered a time of intensified volatility. I see the market as range-bound and am using only 10% of the equity allocation of my portfolio at present to trade the market. The one stock I am still buying on dips and holding is AT&T. Even as the market crashed 35%, AT&T only fell to $26. I am using any pullbacks to pad my position. Whenever the yield hits 7% I am a buyer. As always, remember to layer in overtime. Furthermore, you must have courage in your convictions and remain focused on the signal, not the noise. Thanks for your time and consideration. I look forward to your thoughts in the comments section.

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