REUTERS/Rebecca Cook
- Warren Buffett lost out on $5 billion by dumping the "big four" US airlines.
- Berkshire Hathaway sold its stakes for about $4.5 billion after the pandemic struck.
- The shares would have been worth around $9.4 billion today.
- See more stories on Insider's business page.
Warren Buffett's Berkshire Hathaway missed out on $5 billion by exiting the "big four" US airlines last April.
The famed investor's company previously owned between 8% and 11% of American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines. Berkshire spent a total of $7 billion to $8 billion in building those stakes, which were worth over $10 billion at the end of 2019, SEC filings show.
However, shares in the four airline stocks plunged with the broader market when pandemic fears peaked last spring. Buffett and his team dumped their stakes in April, likely netting about $4.5 billion based on the quartet's average trading prices that month.
Berkshire probably stomached a loss of $2.5 billion to $3.5 billion as a result. The airline stocks have bounced back since then, meaning the conglomerate's former positions would be worth a combined $9.4 billion today – more than double their value when Buffett sold them.
Buffett famously says that his "favorite holding period is forever," and advises investors to "be greedy when others are fearful." If he had practiced what he preached, Berkshire would have avoided a significant loss and notched a solid gain on its airline investments.
To be fair, Buffett decided to exit the airlines based on the information available to him last spring. He couldn't have known that multiple COVID-19 vaccines would be developed in record time, paving the way for travel to resume and the global economy to reopen this summer.
Moreover, Buffett invested in the airlines back in 2016 because he expected people would fly more in the coming years, the companies would at least maintain their value, and they would continue buying back shares.
When he sold in April, it was unclear how long it would take passenger numbers to recover from the pandemic. The carriers had accepted government bailouts that restricted buybacks, required them to hand stock warrants to the US government, and left them on the hook for billions of dollars in loan repayments. At least two were pursuing equity raises that would dilute existing shareholders as well.
"The world has changed for the airlines," Buffett said at Berkshire's annual shareholder meeting last year. "The future is much less clear to me."
The investor may have missed a trick in hindsight, but it's hard to fault his thinking at the time.