In 1994, Warren confessed to a mistake he made.
He had written about it in his annual shareholder letter.
5 years earlier, in 1989, Warren Buffett had written about the purchases he had made.
Gilette was the biggest purchase – spending $600 million.
Next, was USAir – spending $358 million.
Next, Champion International – spending $300 million.
These were the shares Warren Buffett had purchased that year. He spoke about the dividends on offer in their cases.
For those who do not know, Warren Buffett is the chairman of the company Berkshire Hathaway.
He invests money using Berkshire Hathaway. Berkshire Hathaway itself is also on the stock markets. Investors can buy and sell shares of Berkshire Hathaway.
So those who have invested in the Berkshire Hathaway stock follow what Warren has to say closely.
The annual letter and shareholder meeting are two ways investors get to know more about Warren Buffett’s plans and thinking.
5 years later, the tone of his 1994 letter was different.
Warren Buffett spoke of mistakes he had made. He decided to tier them.
The first mistake he spoke about was Cap Cities – he had sold the shares for a loss as he wanted to exit that company. He called this a silver-tier mistake.
The gold-tier mistake was USAir.
Why Warren Hates Airlines
Till the late 1980s, US airlines were heavily regulated. The routes on which the airlines would operate were decided by regulations. The price on those routes was also decided by regulation.
What this meant was that there was very little competition to worry about.
Rival airlines could not lower their ticket prices and give competition to their rivals.
This allowed airlines to maintain good margins.
These regulations were removed.
Warren Buffet notes that running an airline is a difficult task because the costs are very high.
This was not a problem while regulations were in place. Once the regulations were removed, airlines could charge whatever price they wanted to – higher or lower.
This gave birth to the low-cost airline. No frills, no luxuries. Just a seat and a promise to transport you.
As you would imagine, the margins in such tickets were razor-thin.
This meant airlines had to reduce their prices even more.
This combination of high costs and low margins made airlines an extremely difficult industry to be in.
It was for this reason that Warren Buffett decided to sell his USAir shares.
Mentions Over The Years
Warren Buffett maintained that the airline business was a bad investment.
In his annual shareholder meetings, Warren would get questions about investing in airline stocks for years.
He did invest in a private jet operating company called Netjets. That worked well for him – but Netjets was not an airline. It served a very premium audience that did not mind paying.
In a 2001 meeting, he explained that passengers are very sensitive to the price of tickets. Which makes it crucial for airlines to keep their costs lower than those of their competitors.
In 2013, he called airlines a death trap for investors.
Warren also went on to remind investors that for nearly 100 years since the airplane’s invention, investors have poured money into airlines – without much success.
It was a high-expense, low-margin, commodity business where customers did not have much loyalty.
2016
In his letter in 2016, investors noticed that Warren Buffett had invested in 4 of the biggest airline companies in the US.
In the shareholder meeting that year, he did not say much except a small joke about flying.
Investors were surprised – how did Warren Buffett of all people invest in an airline stock?
He did not provide any explanation at that point in time. It was only in 2017 that he opened up about it.
Warren mentioned that decades ago, the number of competing companies in the airline industry was too high. This caused numerous companies to go bankrupt multiple times.
However, in 2017, the number of competitors was very low. Most of the markets were commanded by 4 airlines – the shares that Warren Buffett had bought.
The margins of these companies had improved and the occupancy rate of the planes was higher.
He hoped that the worst years of the airline industry were over.
2020
As the pandemic hit in 2020, airline stocks were one of the worst affected stocks.
In May 2020, when Warren released his annual letter to shareholders, he informed investors that he had sold off all the airline shares they held.
He held the pandemic responsible for it.
With global-level lockdowns, nobody was flying on airplanes. Nobody knew what the future would look like – or when things would return back to normal.
Several people wondered if the world was changed forever. Warren Buffett was one of them.
Given the bleak outlook, he decided to exit airline stocks entirely.
Yet Again
Warren Buffett had been burnt by airline stocks yet again.
This is despite him being extremely vocal about staying away from airline stocks.
In a funny twist of fate, the US government announced a $54 billion bailout package for the airlines in the US.
That saved the companies.
The industry recovered, margins improved, flight routes increased, and things were going well.
Warren Buffet will probably never invest in airlines again.
What we learn from Warren Buffett’s relationship with the airline industry is that no matter how smart someone is, they can be wrong.
Warren Buffett is one of the best investors alive. Even someone like him can make mistakes.
This is another reason why all of us should never blindly copy what a major investor is saying or doing.
They are humans too. They can make mistakes.
They too are affected by cycles and the ups and downs of the markets.
Based on where they are in this cycle, their beliefs and narratives about an industry can change.
This is why too much optimism or pessimism about any market should be viewed carefully.
Some images in this newsletter may have been generated using AI tools.
Quick Takes
+India’s merchandise trade deficit fell 28% year-on-year to $14.05 billion in Feb (vs $22.99 billion in Jan). Exports fell 11% to $36.91 billion, and imports fell 16% to $50.96 billion.
+Net direct tax collection rose 13.13% year-on-year to Rs 21.27 lakh crore as of 16 March in FY 2024-25.
+LG Electronics received SEBI approval for an IPO having only an offer-for-sale issue.
+Chinese car manufacturer BYD has introduced a new EV charging technology that enables vehicles to travel over 400 km with 5 minutes of charging.
+Kia India will raise its car prices by up to 3% from 1 April.
+The RBI will deploy Rs 50,000 crore in the market by purchasing government securities through an auction on 25 March.
+Bank of Japan kept its short-term interest rate unchanged at 0.50% in its March meeting.
+Edtech company Physics Wallah has filed draft papers with SEBI for an IPO through a confidential filing route: as per multiple media reports.
+The US Fed kept its interest rates unchanged at 4.25% to 4.5% in its March meeting.
+India’s gem and jewellery exports fell 19.73% year-on-year to Rs 21,085 crore in Jan. Imports fell 37.1% to Rs 11,859 crore. Out of this, gold exports fell 14.1% to Rs 6,549 crore (all gross figures): GJEPC.
+EPFO added a net of 17.89 lakh members in Jan (a year-on-year rise of 11.67%). Of this, 8.23 lakh were new members (a year-on-year rise of 1.87%).
+India’s forex reserves rose by $300 million to $654.27 billion in the week that ended on 14 March.
+Japan’s annual inflation rate fell to 3.7% in Feb (vs 4% in Jan). Core inflation which excludes fresh food prices, also fell to 3% (vs 3.2% in Jan).
+The central government will infuse Rs 11,440 crore into Rashtriya Ispat Nigam Ltd (or Vizag Steel), a Navratna PSU, to manage its debt and other liabilities. RINL operates a 7.3 million tonnes per annum capacity plant.
+The Defence Acquisition Council (DAC) approved capital acquisitions worth over Rs 54,000 crore, including upgrades for T-90 tanks, Varunastra torpedoes for the Navy, and AEW&C aircraft for the Air Force, etc.
6-Day-Course
Theme of the week: biases experienced in bear markets
We’ve reached the end of this week’s course that started on Monday. Here’s a test you should take. Get pen and paper!
Question 1:
Hindsight bias makes events seem:
-Unpredictable
-Obvious
-Random
Question 2:
Sunk cost fallacy can cause investors to hold on to bad investments for too long.
-True
-False
Question 3:
What does projection bias make investors assume?
-Markets are random
-Prices will reset
-Trends will continue
Question 4:
Overestimation bias can lead investors to be either too optimistic or too pessimistic in bear markets.
-True
-False
Question 5:
Due to the disposition effect, investors tend to:
-Hold losing stocks
-Sell at a loss
-Buy more assets
Answers:
Q1: Obvious
Q2: True
Q3: Trends will continue
Q4: True
Q5: Hold losing stocks
The information contained in this Groww Digest is purely for knowledge. This Groww Digest does not contain any recommendations or advice.
Team Groww Digest