Investors betting against Warren Buffett

At the recent Berkshire Hathaway annual shareholders’ meeting, Warren Buffett virtually announced he was selling all of his airline positions stating, “The world changed for airlines.” Although usually a long-term investor, he projects the airline industry will not turn around for at least the next four years. “Our airlines position was a mistake” he stated. The coronavirus pandemic has hit the airline industry the hardest.  Airlines are operating at 90% less capacity. They have accepted government bailouts in order to avoid potential bankruptcies and there is even talk of government equity in certain companies to keep them afloat. However, some investors are betting against the “Oracle of Omaha”.

As I mentioned in a recent article on the recovery of the economy, recovery depends on consumer behavior as much as company fundamentals moving forward. In order for the economy to thrive, people will need to be comfortable traveling again.  Some investors are seeing the value in the stocks, but do not understand the length of the recovery that Buffett sees for the industry.  They are betting the airline industry will once again thrive and that is shown by their increased interest in the ETF JETS.

According to ETF.com “JETS invests in companies within the airline industry, which spans passenger airlines, manufacturers, airports and terminal services. Small-, mid- and large-cap companies are included from both the US and internationally. The fund puts about 70% of its weight in US large-cap passenger airlines.” Delta, American, United, and Southwest account for over 40% of the fund’s holdings. Although the airlines’ balance sheets and stock prices are falling, the ETF JETS has taken off over the last month. Over $600 million flooded into the fund over the past few months. AUM at the beginning of the year was just $64 million.

JETS also has over 40 straight days on inflows. What is interesting is the behavior shift from what we normally see. Usually investors are following recency biases and want to buy the latest hot stock at the top right before it pulls back. What they are anticipating now is that this could be the bottom and there will be a sharp turnaround due to pent up demand.

Although the fund is down almost 60% YTD, investors are taking a contrarian view on the fund. According to Robinhood, in February only 250 accounts held the JETS fund while currently over 20,000 investors do today. The price of the fund is going down while the number of investors increases.

Investors are not looking at the falling price of the stocks. They are betting on the intrinsic value of the companies. They believe that airlines would be thriving if it were not for this pandemic. At Wiser Wealth Management we do not invest in individual securities, even industry specific ETFs. However, we believe in diversification across various sectors and asset classes through low cost ETFs.  JETS investors are betting on the recovery of the airline industry, nevertheless we at Wiser do not invest in speculative industry specific funds. We invest in healthy core long-term asset classes.

Matthews Barnett, CFP®, ChFC®, CLU®, Financial Planning Specialist

Posted 5/15/2020