Let’s start by saying that I am a fan. I have been following Warren Buffett since I was in college. On the morning of February 22, 2020, I woke up, made a pot of coffee and settled in to read the annual letter from Berkshire Hathaway, the same thing that I have done on the morning of the letter’s release for as long as I can remember. But I am not Warren Buffett. As a trend following, momentum investor, my style does not come close to resembling that of the Oracle of Omaha. You see, my risk profile and my investment horizon are likely much different from his. I read the letters because Warren is smart. I read the letters because they may offer a view of the world and the financial markets that differs from my own. I do not read the letters to get stock or ETF ideas because I am not Warren Buffett and neither are you.
This past weekend was the annual meeting for Berkshire shareholders, hosted virtually as much of our events are these days. While Warren offered his normally upbeat view of the long-term potential for the United States of America (which I share), the take-aways in the near-term were decidedly downbeat. Remember his op-ed in 2008 about how he was “buying America?” That’s not the case this time. In turn, the internet has gone crazy trying to figure out why Warren does not see “value” in the current state of the market in the US. This prompted many to believe that the market is likely heading lower or that the bottom of this move has not yet been reached. But I think Warren would be the first to admit that he does not know if this is the case. No one has a crystal ball, not even the famed Oracle.
The second main takeaway from the weekend’s meeting was that Buffett had exited his positions in the beleaguered airline stocks that he had held. He acknowledged that their businesses are likely impaired by the COVID-19 pandemic and may take a while to come back. In this regard, I applaud him for changing his view (and positioning) as the facts have changed as he sees them.
In my view, if you follow another investor blindly, without doing the work yourself, you are constantly doing just that…following. It is a well known fact that Buffett was long the airlines. His holdings are public information and a quick look at the top 25 (as a percentage of the portfolio) as of February 14, 2020 would reveal that Delta (DAL), Southwest (LUV) and American (AAL) were all on the list. So as the airlines sold off with the start of the pandemic, many investors may have assumed that Buffett would “see value” and add to his existing position. Based on this assumption, investors seemingly poured into the stocks. Take a look at the chart below from Robintrack which looks at the number of accounts on the Robinhood platform that hold AAL. As the stock sold off, the number of accounts holding it (green line) skyrocketed. The same is true for DAL and LUV.
Were all of these investors speculating that Buffett would back up his bet? It is impossible to say for sure, but it may be inferred that this was partially the reason given his wide following. So now Buffett is out and the stocks are moving lower this week just as all of these new investors were rushing in.
What if I told you that it is my view that Warren and these investors who may have followed him never should have been there to begin with? Thankfully there is an ETF that we can use as a proxy for the industry. The US Global Jets ETF (JETS) counts the three stocks in question as its top three holdings as of May 6th. But here is why I would make the case against the investments. But for a short period of time in late October / early November 2019 the JETS ETF has been lagging the SPY for the majority of the past 12 months. In January 2020, our ETF rating turned bearish where it remains today. This combination of a bearish rating and weak relative strength was clear when JETS was trading near $30, well above the current price near $13. Check out this chart from PortfolioWise.
It is also well known that Buffett is a fan of the banks. Take another look at the top 25 holdings and you will see the likes of Bank of America (BAC) and Wells Fargo (WFC). Similar to the airlines, the number of accounts on Robinhood holding these stocks has ballooned as their prices have fallen. But take one look at the SPDR S&P Bank ETF (KBE) and you will notice a fund with a bearish ETF rating that has also been lagging the SPY for the better part of the last 12 months.
Warren Buffett is a legend in the field of investing and this post is not a knock on him. As I stated from the onset, I am a fan. I want to highlight that just because someone is a legend, does not mean that he/she should be blindly followed into any and all investment opportunities.
For the record, I do not own any banks or airlines. I do not own JETS or KBE either. These do not fit with MY style or timeframe. At the same time, I am not saying that my view of these opportunities is the one that you should adopt. But hopefully I have prompted you to think about things a bit differently and therefore added some value to YOUR process.
Dan Russo is the Chief Market Strategist at Chaikin Analytics where he writes the Daily Market Insights newsletter and provides thematic trading and investment ideas for clients. Dan is a Chartered Market Technician (CMT) and a member of the CMT Association. He holds an MBA in finance with an international designation from Fordham University.
Follow Dan on Twitter @DanRusso_CMT