Warren Buffett might be one of the most successful investors in stock market history, but he doesn't hesitate to admit that he makes mistakes. In his long history at Berkshire Hathaway (BRK.A 0.03%) (BRK.B +0.18%), Buffett has had plenty of time to make moves that in hindsight have cost the insurance conglomerate and its shareholders billions of dollars.
One of Buffett's most recent moves to receive criticism from investors is his handling of Berkshire's holdings of airline stocks in the immediate aftermath of the COVID-19 pandemic. Many point simply to the terrible result of selling at which proved to be just about the absolute low point in the pandemic-driven sell-off. But results-oriented thinking can lead to misleading conclusions that in the end can keep you from becoming a better investor.
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A short history of Buffett's latest airline investments
Buffett has long been a skeptic of airline investments, noting their history of bankruptcies and destruction of shareholder value. It was therefore surprising for many to see Berkshire build up significant positions in Delta Air Lines (DAL +0.30%), Southwest Airlines (LUV 0.19%), American Airlines Group (AAL +1.29%), and United Airlines Holdings (UAL 0.12%) starting in 2016.
By early 2020, Berkshire's stakes in a couple of his airline holdings had reached 10%. There was even speculation that Berkshire would buy an airline outright.
Yet as the pandemic brought air travel to a halt, Buffett made an about face during the spring of 2020. He made substantial sales of airline stocks in early April and then exited all of his positions by the 2020 shareholder meeting in early May.
Since then, airline stocks have recovered sharply. By one account, had Buffett held on to his stocks, then they would be worth nearly $5 billion more than the sales proceeds he actually got.
Buffett thinks in bets
As big a blunder as that might seem, the apparent lost opportunity is only a mistake from the viewpoint of what actually happened. But as decision strategist and world-class poker player Annie Duke explains in her book Thinking in Bets, relying on results-oriented thinking can be dangerous.
Buffett has made his rationale for selling airline stocks quite clear:
- Although there was a chance that the government would step in to bail out airlines, it was far from a foregone conclusion at the time. Indeed, had Berkshire held on to its position, the government might well have been less inclined to offer assistance, jeopardizing the airlines' future. Moreover, much of that assistance came in the form of outright grants that airlines won't have to repay -- a move that still rankles some who argued that small businesses should get the same level of support.
- Even now, airlines still face big hurdles. Although domestic travel has opened up significantly, there are still substantial restrictions on the international routes that Delta, American, and United rely on for much of their sales and profits. Debt levels are higher than they were before the pandemic as well.
- Business travel might yet never return to pre-pandemic levels. Innovations like improved video conferencing and remote work arrangements are here to stay, and they'll likely displace at least a fraction of air travel indefinitely.
Of course, Buffett couldn't be certain that his worst-case scenarios would come true. But again, that's not the right metric to use. As Duke explains, "What makes a great decision is not that it has a great outcome. A great decision is the result of a good process, and that process must include an attempt to accurately represent our own state of knowledge. That state of knowledge, in turn, is some variation of 'I'm not sure.'"
In other words, there's nothing wrong with embracing the uncertainty inherent in any decision. Great decision-makers won't get great results every time, but their superior processes will lead to superior performance much of the time. In investing, that's all you need to succeed.
Be a better investor
Instead of spending time congratulating yourself for stocks that go up and beating yourself up over stocks that go down, the better path to become a smarter investor is to look more closely at your decision-making process to make sure it's as strong as it can be. The more you focus on putting the odds in your favor, the more likely it is you'll find the same investment success that Buffett is famous for.
