How could Buffett be so stupid?

On May 5, US airlines stocks took off and American Airlines has seen a 54% increase in its share price. Two days before on Saturday May 2, the Oracle of Omaha did a live presentation of his company’s shareholder meeting where he told the world he had dumped all his airline stocks. Airline prices fell for a day or two and since then have been flying high!

This is a life irony that I won’t easily forget. As you can see from my headline, I’ve written something that has been more driven by irony rather than from what is a considered view.

In fact, for me to write and even think — “How could Warren Buffett be so stupid?” — cuts me to the core. However, after years of studying Buffett, I actually reckon he would say: “I was stupid!” Or at least he’d admit that maybe he got it wrong.

Warren has always told us that: “in the business world, the rear-view mirror is always clearer than the windshield”.

Now that airline stock prices have shot up, it makes some people question Warren’s power. One guy said Warren had lost it when he was slow on to the tech boom that brought the FAANG stocks of Facebook, Apple, Amazon, Netflix and Google (Alphabet). But he has around $80billion of Apple stocks and is close to 25% of Berkshire Hathaway’s (BRK) holdings. BRK also has a billion plus in Amazon.

I recently interviewed Paul Black, the CEO and Portfolio Manager for WCM, which is a US fund manager that has two funds on the ASX. I know this because my team brought the fund manager to Australia and WCMQ and WQG have performed well since they were listed.

The US-flag ship fund was up 10% this year, which is extraordinary given the huge sell-off on the stock market, thanks to that damn Coronavirus. Paul told me in an interview (which goes out my Switzer TV Investing programme on Monday) that like me, he sees Warren Buffett as an inspirational influence on how to invest and think about stocks.

He too said he was surprised that Warren would’ve dumped airline stocks when they were trashed and their share prices were so beaten up. As he reminded me, “Warren has told us to be greedy when others are fearful and be fearful when others are greedy”, so this was out of character.

Paul is surprised that Buffett and BRK is sitting on $US128 billion of cash after selling out of its entire stakes in the four largest U.S. carriers, as coronavirus devastated travel demand. The losing investment contributed to the company posting a net loss of close to $US50 billion in the first three months of the year.

But there is another way of looking at this play. What if Buffett thinks another big or even bigger leg down was going to hit and hurt stock markets? If that happens, he has a huge war chest to take to the market.

This week we learnt that “Magellan Financial Group’s co-founder, Chris Mackay has quietly turned extremely bearish on equities, switching almost half the holdings in his $1.6 billion global equities fund to cash.” (AFR)

And Tom Richardson reported that his holdings of cash was only 2.2% in January this year, so he certainly looks to be on a unity ticket with Wazza, at this point in time.

“Mr Mackay defended the 46 per cent cash weighting by using his latest market update to reference academic research that suggested the market was too optimistic over the likelihood of a COVID-19 vaccine,” Richardson told us.

"Business owners, political leaders and the general public appear to be more optimistic, around the world, as are recipients of fiscal payments travelling hundreds of miles to queue for hours for gaming venues reopening," Mackay wrote in his latest market update.

This is a big call by Mackay. I hope he’s wrong on a number of accounts including:

• For the sake of the economic outlook.
• For the sake of future job creation.
• For the sake of my clients’ asset values which have recovered nicely since the rebound started on March 24.
• And for the sake of my own investments!

I don’t like it that I’m at odds with Wazza and Macca but this is an opinion business and uncertainty is always a given.

Howard Marks of Oaktree Capital is a guy whose newsletters are avidly read by the likes of Buffett and Ray Dalio, one of the world’s biggest and richest hedge funds, and a few weeks ago he admitted that his great market knowledge was being tested by the Coronavirus and the lockdowns that have dogged economies and markets.

This is how he summed up his and our predicament as investors:

• The world is an uncertain place.
• It’s more uncertain today than at any other time in our lifetimes.
• Few people know what the future holds much better than others.
• And yet, investing deals entirely with the future, meaning investors can’t avoid making decisions about it.
• Confidence is indispensable in investing, but too much of it can be lethal.
• The bigger the topic (world, economy, markets, currencies and rates), the less possible it is to achieve superior knowledge.
• Even our decisions about smaller things (companies, industries and securities) have to be conditioned on assumptions regarding the bigger things, so they too are uncertain.
• The ability to deal intelligently with uncertainty is one of the most important skills.

That said, he quoted one of my favourite economists, John K. Galbraith, who I asked “what will happen to the economy and stocks” in an interview in 1987 after the stock market had crashed in October of that year. He told me: “That there were those economists who tell you they don’t know and then there are those poor fellows who don’t know they don’t know.”

Howard Marks says he doesn’t know. I don’t know but I gambled the stock market would rebound, though this has come faster than I expected. Chris Joye of Coolabah Capital Investments did know and said so in mid-March when he wrote in the AFR: “When all is said and done, markets will get what they want through signalling what is and is not acceptable. Order will eventually be restored. And this crisis will pass, probably within one or two months. Those that survive will face the investment opportunity of a life-time….”

Warren Buffett and Chris Mackay don’t know what lies ahead and they are gracious enough to say it, but they are clearly betting that we are being too positive on stocks. History says crashes of this kind come with two big legs down, however, this is what Warren has said about history: “If past history was all that is needed to play the game of money, the richest people would be librarians.”

Right now, we are all trying to forecast our future and once again Warren has an experience-created view on those who read the tea leaves and make confident forecasts.

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future,” Warren warns.

This guy is never stupid when it comes to stocks, but he can make mistakes. I hope this was purely a mistake because understanding pandemics and related economic closures and lockdowns bring with them a new kind of uncertainty, making their reading difficult for even one of the greatest investors of all time.

Of course, if Wazza hasn’t made a mistake in selling out of US airlines and Chris Mackay is absolutely right in holding 50% cash, then we could be in for some scary times ahead.

For my part, I’ve bought companies over the past few weeks driven by another of Warren’s observations: “Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.”

That way if I’m wrong in the short term, I will be right in the long term. But of course, I’m hoping I’m right in both the short and the long term.

And in case you haven’t understood me, Warren Buffett could be wrong, but he never would be stupid.