Warren Buffett Says These Stocks Won't Make You Rich

Source: insapphowetrust.

Warren Buffett is an excellent stock picker. But looking at his stock-picking success only shows half of his incredible skill.

In Buffett's case, it's not about the stocks he picked. Often, it's about the stocks he didn't pick -- stocks he would never own.

One of Buffett's biggest mistakes
In 1989, Warren Buffett had the opportunity to put $358 million to work in US Airways (NYSE: LCC  ) . He received a preferential deal. For his investment in US Airways preferred shares, he'd earn a 9.25% dividend each year. This investment would be great for a company like Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , which had billions to invest from its insurance businesses.

Unfortunately, the investment didn't pan out. Buffett, who had long been a critic of airlines, thought this time might be different. It wasn't. US Airways had costs equal to $0.12 per passenger mile. A new competitor, Southwest, came to market with a business model that put its costs at $0.08 per passenger mile.

Since air travelers have little, if any, loyalty to the company behind a plane, US Airways found itself financially stressed. Buffett eventually got out of the investment, an event he later described as pure luck.

Why airlines aren't good investments
Since the birth of the industry, airlines have produced negative cumulative profits. That is, if you add up the profits and losses of every American airline through history, the sum would be negative. So far, this has clearly been no place to put money to work.

"Hey, nice machine! Just don't ask me to invest in it."

On several occasions, and in the 2008 Berkshire Hathaway annual report, Buffett said the following about airlines:

"If a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down."

Buffett isn't the only investor to avoid airlines. Airline industry legend and former chairman of American Airlines (NASDAQ: AAL  )  Robert Crandall once warned his workers that the airline he led was a terrible investment. He once said the following:

"I've never invested in any airline. I'm an airline manager. I don't invest in airlines. And I always said to the employees of American, 'This is not an appropriate investment. It's a great place to work and it's a great company that does important work. But airlines are not an investment."

Keep in mind, Robert Crandall isn't just another stock picker or analyst. He's a former airline executive who has won countless awards for his work in the airline industry. If he doesn't believe airlines are investable, how should we?

The fact is, operating an airline is costly. Customers aren't loyal. And unforeseen events, like the recent deep freeze across the United States, can cost the industry millions. Some estimate airlines stand to lose $50-100 million just from cold weather in January.

The key takeaway
Some industries are great for investors. Some are great for consumers. Airlines fit in the latter category. They invest billions of dollars of investors' capital to send passengers from one side of the world to the other, quickly and safely. But when it comes to rewarding shareholders, very few have succeeded. And for that reason -- the fact that airlines are better for customers than shareholders -- Buffett's Berkshire Hathaway will likely never, ever invest in another airline.

Learn from Buffett's biggest wins and worst losses
Warren Buffett has made billions through his investing (and avoiding airlines), and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.


Read/Post Comments (11) | Recommend This Article (31)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 19, 2014, at 1:29 PM, adamwins76 wrote:

    Totally agree. However, airline stocks did crazy good last year for short term traders.

  • Report this Comment On January 19, 2014, at 1:37 PM, TMFValueMagnet wrote:

    Adamwins76, I find it remarkable. Sentiment is everything in the short term. Airlines experienced a single year of good earnings. Now they're back to business as usual, expanding fleets and stealing inches from each seat to add new capacity.

    When the industry is rational, and seeks to make a profit, they do quite well. But it only takes one bad actor to ruin the whole play with overcapacity. The resulting price wars stand only to help the customer, not the investor. I definitely won't add an an airline to my portfolio based on recent, and in my opinion, temporary improvements.

    Thanks for reading!

  • Report this Comment On January 19, 2014, at 2:39 PM, buzzltyr wrote:

    I have made a truck load on airlines and they are still underpriced

  • Report this Comment On January 19, 2014, at 4:44 PM, StayDry wrote:

    If you are really psyched with Buffett's recommendations, you should buy BH stocks. Otherwise, it's better to look at shared holder, public information about the company.

    Airline stocks are blue chips. They are big and not likely to go away. Not sure what the article is comparing them to, there are stocks worse than airlines too.

  • Report this Comment On January 19, 2014, at 8:46 PM, bill824339 wrote:

    I think one time Warren Buffett gave advice on how to become a millionaire. It was something like, "First, become a billionaire and then invested all in airline stocks!"

  • Report this Comment On January 19, 2014, at 11:14 PM, ubba wrote:

    Right, and Buffett sold his US Airways shares at something like $5 and a year and a half later it was at $62.

  • Report this Comment On January 19, 2014, at 11:42 PM, whyaduck1128 wrote:

    TMF's infatuation with Buffett, and its slobbering over his every utterance, often borders on being a cult.

    He's a terrific investor and a person from whom one can learn a lot, but contrary to The Narrative, he is not infallible, so please stop treating him like he's God.

  • Report this Comment On January 20, 2014, at 1:11 AM, screwme wrote:

    OMG!

    Buffet never lost a dime on US Airways stock. He might have not received his 9.25% return but he never lost a single penny!

    whyaduck1128 is exactly correct.

    You place your bets and you take your chances.

  • Report this Comment On January 20, 2014, at 1:44 AM, jlclayton wrote:

    A Fool will always learn everything they can from a successful investor, a fool will think those lessons are not worth their time.

  • Report this Comment On January 20, 2014, at 1:59 PM, ValueGuy23 wrote:

    This article uses quotes that Warren Buffet said 10-15 years ago. It is true that airlines as a whole industry had business models that were broken. The industry as a whole had average RASM around 9 cents a mile when their CASM range was from 7-8 cents a mile in the case of Southwest and Amrica West to 13-15 cents in the case of the legacy carriers like American, Delta, United, US Airways, Continental, Northwest etc.. The business models were broken, with excess capacity and no pricing power.That was 10-15 years ago. Now the industry has lowered capacity, the consolidation has lowered the airline count to 5 major players, and the industry has introduced bag fees, change fees, change your seat fees, don't walk to the back of the plane too many times fees etc.. that have stuck. Now the industry finally has business models that are not broken. With RASMs in the 12-13 cent range and CASM in the 8-9 cent range. Finally airlines as an industry are proftiable, with a sustainable business model. Forget what they did 10-15 years ago, look at the models now. I gurantee if you ask Warren Buffet today what he thinks of the industry, he will be cautious because he got burned in the past, but he can't say an indutrsy with 5 major players that are all profitable have a flaw. American Airlines (AAL) has a market cap of $10 billion and they have $10 billion of cash on their book, its trading for its cash position at less than 5 times P/E, growing revenues and earnings and number one in their industry (like Coke or American Express) . You can't tell me that's not a business right up Warrem Buffet's alley......While whiners like you cry about what happened to them 15 years ago, Warren Buffet is quietly accumulating airline stocks.....

  • Report this Comment On January 21, 2014, at 10:57 AM, Seanickson wrote:

    Ubba,

    Berkshire redeemed the usair investment at roughly $62 in early 1998 when it was called, receiving roughly $573 million. He had tried to sell it a couple of times in 96 but was unable to

    His cost was $358 million but given the dividends(which were 13-14% for two of the years due to nonpayment penalties) it didnt work out too badly after all.

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