Warren Buffett bought Delta Airlines in February after the airline shares tumbled as the scale of Covid-19 related shutdown started to emerge.
One of the wealthiest Germans, Herman Heinz Thiele, whose net worth is over $12billion, doubled his stake in Lufthansa the airline in mid-March.
What's going through the heads of these two people who have been investing for decades?
Is it Permanent Loss of Capital
One of the value investing tenets is to avoid a permanent loss of capital. I can't believe there isn't anyone reading this who isn't experiencing a temporary loss of capital. Ouch. Hard times.
Let's talk about a permanent loss of capital. Perhaps your holdings aren't generating the dividends, or the numbers on your pension fund accounts are suddenly a lot lower than at Christmas?
But taking a 3-5 horizon, how many of your investments are going to see a permanent loss in value? Things might be scary in the short-term, but looking at your portfolio through a "permanent loss of capital" lens is useful. If you sell now, you lock in your permanent loss of capital.
There isn't a single one of us who knows how this Covid-19 thing ends. What you can do is make a call - is your investment experiencing a permanent loss of capital or not?
Warren Buffet and Thiele are betting with their money that global airlines are not going under.
Mark to Market
I'm guessing you're sitting at home while you read this? Aren't so many of us in the investing world these days. Alas, despite our inflated sense of importance in regular times, we investors aren't "key workers."
I'll assume you own the house you're living in. During the 2008 crisis London house prices fell 16% (and then recovered and more…). I never noticed. My house didn't feel 16% smaller or 16% less useful. I have no idea where the "bottom" was in the London housing market. That's because I wasn't marking my house to the market. I couldn't have quickly even if I wanted to. The stock markets re-price companies every 6 seconds. With illiquid assets such as houses and private companies, it's hard to discover their price without much investigation.
The investing world has long wondered why the large university endowments continue to put money into private equity. Some excellent research by Anti Ilmamanen, suggests it's really so that in terrible markets, like the one we are in, they can't mark a lot of their portfolio to any fall in value, so it helps with return smoothing. If you're a private investor, you should try and borrow this mental trick.
Two ideas to ponder.... 1. determine if your investments are really a permanent loss of capital 2. not marking to market can be a useful way to stay sane.
If you're a long term investor and want to feel better, please invest some time in reading these two papers….
1. THE Howard Marks, not calling the bottom yet, but they are buying up bargains.... scroll to the last page if you want the summary of his analysis.
https://www.oaktreecapital.com/docs/default-source/memos/weekly.pdf
2. Dan diBartolomeo
One of my favorite quants wrote a note for his pension fund and sovereign wealth fund clients, and also posted it on their website for us mere mortals. Over the very long term - 10 years, his models don't show much damage.
"So, if an investor had a 10-year time horizon and the pandemic effects are similar to war, the expectation of the cumulative return of their portfolio would decline by -1.44%."
https://www.northinfo.com/documents/937.pdf
Thanks,
Mallika