If you're a fan of Warren Buffett, as so many of us are, you can probably already recite many of the rules for both investing and life that the Oracle of Omaha has shared over the years. But depending how you count, Buffett has broken either two or three of his most famous rules in the last month. His willingness to ignore his own rules -- and to publicly admit his mistakes and explain his thinking -- tells you all you need to know about Buffett and why it's smart to listen to everything he says.
1. "Rule Number 1: Never lose money." (It's also Rule Number 2.)
"Rule Number 1: Never lose money. Rule Number 2: Don't forget Rule Number 1."
Buffett has given investors this advice for decades, and for those same decades, ordinary mortals have tried to parse out exactly what he means, because it's pretty much impossible, even for Buffett, to truly never lose on any investment. Some interpret that to mean that if you believe in a company and its price goes down, you should continue to hold it and wait for it to come up again. Others interpret it to mean you should buy only companies with such solid fundamentals and low prices that the share price is unlikely ever to drop.
Whatever you think it means, in April, he broke that rule big time. Berkshire Hathaway sold $6.1 billion in stock which Buffett says came from dumping all its shares in the "big four" U.S. carriers: American, United, Delta, and Southwest. Business Insider reports that he sold the shares at a fraction of their original cost, creating a sizable loss.
Buffett has long had a love-hate relationship with airlines as investments, usually more hate than love. But in 2016, he bet on the big four because he was watching the trends. Demand for air travel was on the increase. The airlines had backed off their fare wars and ticket prices were stable. Most attractive of all, airlines were engaging in stock buyback programs, which seemed to provide some certainty that he could avoid losing money.
The coronavirus changed all those calculations, as it's changed so many things. With air travel demand plunging, all major U.S. airlines are receiving government bailouts that restrict or forbid stock buybacks. And Buffett doesn't see things getting better anytime soon since the public will likely remain cautious about air travel for a long time. Even if demand returns to 70 or 80 percent of its pre-2020 levels, airlines will be left with "too many planes," he told Berkshire Hathaway shareholders at the company's virtual annual meeting.
Rather than wait and hope for the best, he decided to get out even though doing so meant locking in big losses during one of the company's worst quarters ever. "It turned out I was wrong," he said. "Our airline position was a mistake." That ability to openly admit to an error and take quick steps to correct it is one of Buffett's greatest strengths as an investor and as an entrepreneur.
2. "Be greedy when others are fearful."
"Be fearful when others are greedy and greedy when others are fearful." This Buffett-ism may be even more famous than Rules Number 1 and Number 2. It's telling people to buy when shares are low or dropping in price, and to sell, or at least refrain from buying, when they're climbing. That's very sound advice and unfortunately the opposite of what most individual investors do.
With more than a decade of continued economic growth and the stock markets at record highs, it is no surprise that over the past several years Buffett has mostly been fearful. Before the coronavirus hit, he displayed that fearfulness by refraining from major investments and building up Berkshire Hathaway's cash reserves, which reached $128 billion by the end of last year.
Back in 2008 when the collapse of Lehman Brothers brought on the Great Recession, Buffett did a lot of buying, saying in an op-ed that American businesses were fundamentally sound and that over the long term the economy would grow and markets would rise. So Buffett watchers have been anticipating similar actions now as a result of the coronavirus. Instead, Buffett sold off his airline stock and wound up sitting on even more cash -- $137 billion.
Why isn't Buffett being greedy? Basically, because of government bailouts. The federal government's willingness to swiftly provide stimulus money brought the markets back fast from their sudden dip, so that the S&P 500 is at roughly the same place today that it was a year ago. In other words, even though the future is uncertain, investors aren't yet being fearful enough to flip Buffett over toward greed.
Will the markets drop further, enough to make Buffett start buying? Or with the federal government helping out, will they stay stay stable? Only time will tell. But the fact that Buffett is still fearful is something we should all consider as we contemplate the future.